In the past few years, environmental, social, and governance (ESG) has become popular among corporate organizations. With recent debates over ESG investment and business philosophy we wanted to explore the potential impacts of ESG regulations on local people, businesses, and economies.
First, what is ESG?
ESG refers to the consideration of environmental, social, and governance factors in investment and business decisions. The idea is that, to do good for the world, corporations should pursue environmental social governance goals rather than just focusing on profit. To some extent companies have been engaging in ESG activities for a long time to improve their business operations and practices. Treating your workers well helps them to be more productive, and conserving energy saves money. Without question, doing good is good business.
However, part of the ongoing debate centers around ESG investing, which focuses on evaluating and selecting investments that meet criteria around an organization’s standards and practices.
How Could ESG Affect Local Businesses?
With financial markets making up the infrastructure of the economy, the extent to which ESG investment is operated through the financial system will determine its impact. Finance is the means by which individuals start companies, buy equipment, and pay their employees. Having a well-functioning financial system is essential to economic growth and individual prosperity. If banks are compelled to restrict the ways in which they finance business, whether by their own decision or the government, they systematically advantage some industries and companies and disadvantage others.
Currently, companies may engage in practices that positively impact environmental, social, and governance factors in a number of ways. The challenge with regulating ESG efforts is there is no clear criteria for what makes a business ESG nor is there a single regulatory body that determines such criteria. Although there are a number of organizations dedicated to understanding and certifying specific industries (think B-Labs, LEED, Fair Trade, Cruelty Free, etc.), none are able to comprehensively quantify ESG.
ESG is a complex evaluation of risks and benefits with subjective decisions, each weighing differently depending on the industry or business. ESG practices that are practical and provide opportunities for one business may be entirely different for another business based on size, scale, and industry. There can also be conflict of interest between the ESG factors that a business decides to pursue.
Unintended Consequences
Every action has unintended consequences. If ESG became legally entrenched, there could be substantial negative economic impacts.
Historically, economic growth has improved the environment, improved the social status of women, improved social equality, and allowed lower-income people to get educated and lift themselves out of poverty. Prosperity correlates positively with social and environmental outcomes. If regulatory actions slow down the economy in the name of ESG and other goals, it could undermine the goals that ESG ultimately aims to achieve.
What’s more, ESG goals that are pursued without the effort to get buy-in escalates public distrust in both civic and private institutions. In recent years, the Edelman Trust Barometer has shown that business has become the most trusted institution above government, media, and NGOs. Businesses who choose to pursue social goals currently make a conscious, intentional choice to do so. When regulatory restrictions remove this intentionality, it may lead to less trust in the authenticity of business to do good.
Stakeholder Focus
While there are challenges associated with regulating ESG practices, voluntary ESG goals don’t appear to have a big economic cost. There is widespread support across political lines for companies to look after all their stakeholders. According to a recent survey by Penn State’s Center for the Business of Sustainability and communications firm ROKK Solutions found that a majority of Americans don’t support banning ESG investments or other similar restrictions. They think it should be up to investors to decide what's best.
There are many ways through which businesses can do good and a focus on creating value for stakeholders can help build resilience and bottom-line results for the long term. The opportunity for companies to have a social impact, or positive social outcomes, generated by business activities are many. They may include initiatives such as creating products or services that solve an unmet social need, doing pro bono projects that advance the mission of community nonprofits, or reducing negative environmental impacts as a result of company operations.
Companies have shown time and again that when we choose to focus on creating the best outcomes for all stakeholders we elevate others, build trusting relationships, and improve our bottom lines. As we consider the impacts of ESG, it is important that we preserve free enterprise and leave businesses the choice to allow their actions to stimulate growth, solve problems, and make a positive impact on the world.
Resources:
The below sources provide a diversity of information and viewpoints on the subject of corporate ESG. At Curio412, we believe that an Open Exchange of Ideas fosters a culture that enables people to peacefully hold deep differences and productively disagree. Our goal is to provide a resource and opportunity for informed dialogue around these topics.
Curio412 is a consultancy for businesses and nonprofits who want to improve their bottom line, build relationships, and scale meaningful impact. We believe in creating lasting impact. Which is why we share knowledge and tell stories to keep nonprofits, business, social enterprises, and charitable organizations informed about current trends, ideas, and impact.