References to concepts like ESG, impact investing, social responsibility, carbon footprint initiatives, sustainable investing, climate change, green or sustainable funds and other related concepts are at every turn now in the business media. Collectively, these can be referred to as “do good” precepts. This is not a new development. It’s been ongoing for the past 20-30 years.

Whether or not you believe in climate change, sustainable renewable energy — which is cheaper in many cases and cleaner than fossil fuels — makes sense. Urging corporations to be mindful of the impacts they have on the communities they operate in is not a bad thing. While Europe is 20 years ahead of the U.S. in the integration of these concepts in standard business mantra, attention to these concepts in the U.S. is accelerating. But the new focus is on more than just climate change. What are these concepts, and how are they affecting business?

ESG

Today, it is standard for a public company to have an ESG report, a sustainability report or perhaps a social impact report included in a U.S. public company’s annual report. So first, let us briefly discuss many of these more popular concepts. ESG stands for “environmental, social and governance,” and it generally represents the most broadly applicable factors for evaluating the stewardship of a business.

The “environmenal” part of ESG examines how the business is operated in a sustainable manner from a global ecological perspective. This would clearly include attention to mitigating the business’s carbon footprint and other global warming concerns, such as energy consumption, energy efficiencies and sustainability of the materials it uses, and its manufacturing and business processes. It would also include issues like water quality, waste removal and processing, etc.

The “social” prong of ESG relates to the overall social impact, both internally and externally, of the business and its products in the communities it serves. Does it have policies to combat discrimination of employees based on sex, gender, religion, age or any other relevant basis? Does it have programs or spend money assisting the communities in which it operates and serves with preventative health programs, medical assistance, basic educational assistance or similar programs? In other words, are the communities in which the business operates otherwise enhanced aside from the jobs and taxes created by the business?

The “G” part of ESG stands for “governance.” This prong entails several things. For instance, is the decision-making process of the business open and straightforward? In times of crisis, does the company hold back information, or is it open with the public? Does the voting regime of the company reflect the economic rights of its shareholders?

Related Concepts

The other often-mentioned concepts tend to have a much narrower scope. For example, a carbon footprint initiative would focus on reducing the carbon emissions of a single business activity and nothing more. These types of sustainability initiatives focus on the improvement of manufacturing products and processes, but they often ignore the company’s impact on the local community or the governance of the company itself. This is a very important, but narrowly focused objective.

Impact investing is also a very trendy concept. Many family offices for the wealthy focus on making impact investments. What they are referring to here is making an investment that may generate tangible improvements to the community being served by the investment. For example, affordable housing in a specific community lacking workforce or more modest housing, solar-powered batteries to provide light at night for communities that do not have electricity or funding for a charter school in a school district with poor educational outcomes. These are all noble concepts and goals, but impact investing tends to be narrow in focus as well as the depth of the impact in a community. For a community, the question may be what other follow-through or complementary programs are introduced in the community in order to have a truly transformational impact. Certainly, a company could have impact investing as part of its “S” leg of ESG.

Lack Of Standards

Interestingly enough, despite widespread acceptance by European businesses of the need to incorporate these concepts in the standard operations, there is not a widely recognized standard for evaluating compliance with these “do good” precepts. There are a couple dozen different companies that perform ratings services on the application of these precepts by businesses, yet none share publicly how they make these determinations.

Not only are there no publicly known standards, there aren’t any industry-specific standards. The result of this situation (which, in my experience, most companies aren’t too concerned about) is that there is no immediate pressure for companies to adopt specific ESG proposals with specific targets. U.S. public companies merely need to annually create general statements of support for ESG precepts.

What is needed in the U.S. is simple and clear. Public companies should adopt the broader ESG approach and principles with respect to the operation of their businesses. This doesn’t require radical change on their part. It could be as simple as rather than writing a check for taxes to the federal government, the company instead could make tax equity investments that satisfy their tax liabilities and at the same time make ESG impacts on their community.

In addition to the adoption of the broader ESG approach and principles, there must be the adoption of minimal common standards among ratings agencies, which are publicly disseminated. There should also be industry-specific standards. Only when quantifiable standards are adopted will ESG principles result in meaningful change in corporate behavior and capital deployment. In the meantime, vague statements of support of ESG principles are all that will be required of U.S. public companies.

Source: Forbes