By Dzulkifli Abdul Razak
The cat is eventually out of the bag! The ESG-cat that is.
The term ESG, has been bandied around mostly by the industrial and corporate sector as though in response to tip-toeing like a cat, around the pressure to adopt the Sustainable Agenda 2030 and beyond – in the context of Education for Sustainable Development (from 2005-2014), and Sustainable Development Goals (2015-2030).
Allegedly, “ESG” made its first mainstream appearance in a 2004 UN report, and by the late 2010s and into the 2020s ESG emerged more comprehensively as a framework that includes key elements around environmental and social impact, as well as how governance structures can be amended to maximise stakeholder well-being.
Earlier, corporate sustainability was expected to integrate ideas around how companies should respond to social issues, which lead to the CSR (corporate social responsibility). Overall, there seems to be a tendency to frame CSR a marketing strategy to overstate (or otherwise misrepresent) efforts and environmental impacts through corporate “philanthropy” as a hallmark.
A practice that would later become known as “greenwashing“.
Like whitewashing, it is deemed as “the act of glossing over or covering up vices, crimes or scandals or exonerating by means of a perfunctory investigation or biased presentation of data with the intention to improve one’s reputation.”
Later, it is commonly used in a political context to over-glorify an outcome or impact by creating a false impression to disguise the wrong! Similarly, the word “green” has been overused to crudely substitute for sustainability, and thus create a similar false impression!
There are now ESG specialists claimed to expertly use some analytical tools in justifying the investments of ESG funds to improve performance across E, S and G measures that are now sprouting to rate ESG in aligning investment decisions more closely around the values aligned to E, S, and G factors.
Companies and their management are rewarded well to those who achieved the ESG standards – greenwashing or otherwise.
For example, according to one corporate financial institute, the E (environmental) standards, is said to refer to an organisation’s environmental impact(s) and risk management practices.
They include direct and indirect greenhouse gas emissions, management’s stewardship over natural resources, and the firm’s overall resiliency against physical climate risks (like climate change, flooding, and fires).
The S (social) aspects refer to an organisation’s relationships with stakeholders, measured against human capital management metrics (like fair wages and employee engagement), and the impact on the communities in which it operates.
Whereas, G (corporate governance) is how an organisation being led and managed towards sustainability.
The ESG analysts will ensure how leadership’s incentives are aligned with stakeholder expectations, how shareholder rights are viewed and honoured, and what types of internal controls exist to promote transparency and accountability on the part of leadership.
While ESG may encompass a broad set of issues, ranging from human capital and compensation issues, to climate change, deforestation, and water and waste management, there is no consensus on the key topics and issues encompassed within each of the E, S, or G categories. Some issues keep on evolving, and it is not easy to try to assign and identify issues to any one or more of those categories.
Additionally, the importance of ESG issues may vary significantly depending upon company specifics, including industry, size, geographic scope, business operations, and business model.
Investors’ and other stakeholders’ views may also widely differ.
Thus, providing opportunities for greenwashing. In other words, how to develop and implement an effective ESG governance structure can be challenging.
There is no one-size-fits-all template to be promoted as it is today!
The recent report by Jomo Kwane Sundaram, an eminent economist, relating to a senior manager of the world’s largest investment firm who has ‘blown the whistle’ on ESG ‘greenwashing’, especially on supposed climate finance, is a significant finding.
The Wall Street whistle-blower, a Chief Investment Officer for Sustainable Investing at BlackRock, founded in 1988, managing over US$9 trillion in assets, starkly exposed corporate ESG pretensions – often associated with ‘responsible’ and ‘impact investing.’ Creating major impact, “seen as confirming and even elaborating on longstanding criticisms of ESG ‘greenwashing,’” noted Jomo.
Citing shareholder capitalism guru Milton Friedman: corporate executives have strict fiduciary responsibilities under the law in ‘shareholder capitalism’ in the US, UK and elsewhere.
Their managerial obligations and conduct thus limit potentially positive ESG impacts.
Rejecting ‘stakeholder capitalism’, Friedman has long emphasized that a corporation’s primary and sole duty is to maximise profits for shareholders.
By so doing as their corporate fiduciary duties above all else, they cannot enhance social or environmental benefits without maximising returns for shareholders.
By law, therefore, social, community or national ethical duties or moral values must always be secondary.
This means corporations must never sacrifice profits or their funds, however noble the cause. Managers are legally required to prioritise shareholder financial interests above all else.
In a nutshell. The G in ESG is more than just “governance” tempered with “gullibility” in celebrating “greed”! E and S are mere pawns in order to disguise the hideous ‘greenwashing’ game from being easily detected!
Now that it is out in the open. It is to call off the charade in order to drive sustainability! – BACALAHMALAYSIA.MY
- The writer is Rector, International Islamic Universiti Malaysia (IIUM)
