Organizations that ignore ESG issues are sleeping
Attacks on an ill-defined concept known as “wake-up” public policy have now extended to attacks on managers and investors who have the “courage” to pay attention to companies’ environmental footprints, organizational governance practices, and social and community impacts. In my opinion, companies that manage with these issues in mind are practicing sound management.In my opinion, “waking up” is just wake and aware of the world we live in.Going against this awareness is just burying your head in the sand sleepwalking through a complex, rapidly changing world economy. These are your choices: awake or asleep. Let’s examine ESG as a management concept rather than an ideological element.
Starting with environmental impact and risk, a company that does not understand and measure its impact on ecosystems and the risks to operations from climate change and climate-accelerated extreme weather events is a poorly managed operation. Fossil fuel companies and shipping companies are extremely vulnerable to environmental and climate risks. If you doubt my assessment of the ecological risks of fossil fuels, ask BP about the cost of its 2010 Gulf of Mexico disaster. If you question the need to understand the risks of transportation, ask Norfolk Southern how much they think the derailment of East Palestine, Ohio will cost them and their shareholders. Additionally, we live on a more crowded and interdependent planet, and every organization must be cognizant of the potential liability they may incur if they poison their neighbors or customers. Organizations that understand their exposure to environmental risks may be better at understanding and managing their exposure to other risks. By laying off rail workers and breaching safety rules, Norfolk Southern appears to be taking risks: shouldn’t investors be aware of these practices? Better risk awareness should lead to lower risk levels and less catastrophic financial losses.
Next let’s consider the company’s governance structure and its hiring practices. An organization that prioritizes one race, gender, religion, sexual orientation or national origin over another reduces the pool of talent it can attract employees and manage operations from. We are in a brain-based economy. The high value-added part of the economy and the greatest profits reside in organizations or parts of organizations that are creative, analytical and innovative. Software is more profitable than hardware. As products become commodities, they are subject to competitive forces that tend to limit profits. That’s why IBM stopped making personal computers. A diverse board and diverse workforce will provide greater intelligence and diverse life experiences to address organizational challenges. Organizations with low levels of diversity tend to inspire isolation and groupthink. Being awake and aware of the value of diversity is an indicator of good management. In the global competition for innovation, customers and profits, a diverse team based on the best talent is likely to beat a more homogeneous team with fewer talents.
Finally, there is the question of an organization’s ability to understand and address its impact on the communities in which it operates. Amazon tried to locate its HQ2 in Long Island City, New York, but misunderstood the political climate, got greedy and negotiated a $3 billion siting subsidy in New York. The community and local politicians were outraged, and eventually political opposition in New York forced Amazon to operate in a suburb of Washington, D.C. city. But the damage to a company’s image is real and not an indicator of complex management. Destroying a city with 60,000 homeless people seems a little ridiculous for a company as rich and successful as Amazon.
Recently, we saw another dire example of dire business-community relations following the catastrophic train accident in Ohio. Norfolk Southern and the US government were slow to respond to the poisoning incident. They misuse their engagement with communities and compound physical and environmental disasters with a complete failure of community relations. The residents are traumatized and rightly believe they have been mistreated by a large, successful corporation. Coupled with government failures to regulate and respond, private and public sector incompetence exacerbates the devastation in communities.
Modern organizations with instant communication and high-speed information transfer are rightly expected to be able to act quickly in response to disasters. Lack of ability to engage with local communities is another indicator of poor management. Yes, the railroads are making money. But how long can this poor security and inability to manage community relations last? The company appeared to be improvising for Ohio rather than implementing a well-planned cleanup and community relations plan. The East Palestine case won’t make people want to run out and buy shares in Norfolk Southern.
In my opinion, ESG investing is not about political ideology, but about effective and competent management. I recognize that some ESG investing is about ideology. Corporations are for profit not social justice. But the path to profitability in the modern world requires management skills demonstrated by companies that focus on ESG impacts. Moreover, efforts to prevent investors from understanding environmental risk factors are incredibly misguided. The politicization of ESG investing is real and could well lead to a first veto from President Biden.according to david gellers New York Times:
“more than $18 trillion Investment funds held follow an investment principle known as ESG – shorthand for prioritizing environmental, social and governance factors – a strategy that has been adopted by major companies around the world. Now, Republicans across the country say Wall Street has swerved sharply to the left, attacking what they call “woke capitalism” and dragging their one-time allies into a culture war. This week, the rancor escalated as Congress joined the fray. Republicans won a 216-204 majority in the House of Representatives on Tuesday, overturning a Labor Department rule that allowed retirement funds to consider climate change and other factors when choosing investment companies. The Senate followed suit on Wednesday, with two Democrats, Sen. Joe Manchin III of West Virginia and Sen. Jon Tester of Montana, joining Republicans to send the resolution in a 50-46 vote President Biden’s desk.the white house has said Mr Biden will block the resolution, which may be the first veto of his presidency. ”
Ironically, pro-market conservative political theorists have chosen the $18 trillion capital financial markets to attack and attempt to regulate. The “anti-awakening” people are showing their ignorance about finances and management. These pundits and politicians are dabbling in the private sector they have no understanding of. Part of the attack on ESG comes from fossil fuel companies as they lose out to renewable energy companies in the race for capital. Fossil fuel companies have long been effective at lobbying and advocacy, with political clout far greater than economic might. The next generation will need fossil fuels, but someday they will be as common as videotapes. New technologies are replacing old ones and these companies either adapt or die. I’ve never been particularly interested in the movement to divest fossil fuels because I assume the market will eventually find out that fossil fuels are a dying industry. That seems to have started. It’s no surprise that members of Congress like Joe Manchin from the states and territories where fossil fuel companies are located want to help these companies stay in business. But they’re better off being encouraged to transition to renewable energy than doubling down on “baby drills.”
While the right is working overtime to politicize ESG, big corporations are struggling to integrate sustainability into management and governance.Wall Street Journal’s Dieter Holger It was recently reported that:
“Companies are strengthening boardroom sustainability experience as they face mandatory climate disclosure regulations. Among Fortune 500 companies, 25% of board members appointed in 2022 previously served on sustainability committees, up from 2021 14% in 2019…Findings from Fortune 500 companies highlight boardrooms’ growing concern that they lack sustainability expertise, especially in climate change and how to reach Zero Greenhouse Gas Emissions”
Part of this trend is a response to the changing regulatory environment that some conservatives are trying to reverse, but another reason to strengthen boardroom sustainability expertise is the recognition that companies’ environmental impact must now be factored in day-to-day management decisions. This means that corporate governance structures must include expertise in sustainability management.
If there is a problem with ESG investing, it is the lack of universally accepted sustainability metrics. It is unclear whether the measures used to determine ESG performance accurately measure that performance. The SEC’s proposed carbon and climate risk disclosure rules are the first step towards developing standard measures for the “E” element of ESG investing. Measuring environmental impacts may be easier than measuring social and governance impacts because physical science measurements are much simpler than social science measurements. However, efforts to manage the organization by focusing on ESG measures indicate prudent and thoughtful operational management.
As sustainability measures improve, it will become easier to distinguish well-managed companies from poorly managed ones. Meanwhile, investors are putting money into ESG funds. Some of these investments reflect ideological concerns, while others reflect an assessment of risk. Efforts by ideologues on the left or right to politicize ESG investing are regrettable, but not surprising. Prudent, prudent management should measure and seek to reduce all unnecessary organizational risks. These organizations tend to succeed in the long run. Hasty, expedient and ignorant management of the world around them requires luck to succeed. Eventually their luck ran out. sometimes in small towns like east palestine ohio.
