“I am increasingly convinced that corporate ESG is the Devil Incarnate.“
Elon Musk
“The social responsibility of business is to increase its profits.“
Milton Friedman
“Words have consequences.“
My Mom
Businesses are under increasing pressure to adopt Environmental, Social and Governance (ESG) goals that are intended to guide them down the paths of righteousness. They are similar to the “mission statements“ that were in fashion a few years ago, but more specific. Unlike those vague mission statements, though, ESG goals may have unintended consequences farther down the road.
As Milton Friedman so persuasively argued, corporations are groups of investors that come together to make a profit. Those corporations do so by operating in accordance with the law, within the constraints imposed by society. They may choose to do more than that, but the production of profits is their core principle. Those profits are the manner of measuring whether what the corporation does provides value to society (if a product is no good, no one buys it) and are necessary for the company to pay wages and taxes.
Businesses may, and usually do, go well beyond what the law requires to be good citizens. They can make it a corporate goal to do good while doing well. TOMS is a shoe company that donates a pair of shoes for every pair that is bought by their customers. (If you haven’t heard the TOMS story on How I Built This, from a February 2019 podcast, you really should.) That ispart of the corporate culture at TOMS, and if you buy stock in a company like TOMS, you expect it to do business in that fashion.
But a goal like giving away shoes is clearer than “sustainability” or “social equity”. In adopting ESG goals, a corporation expands its reason for existence from merely being profitable to also being good. There’s nothing wrong with that, as long as the parameters are well-defined, but they may not be.Like Mom said, words have consequences, sometimes unintended ones.
That’s something we will be exploring at the WVMA Manufacturing Energy Growth Summit May 2-3 at Oglebay Park in Wheeling, W.Va. We’ll look at the Environmental portion of ESG and how soft promises might become hard problems.
Take something like a promise to be carbon neutral by 2035. What does that mean? Is it something that I as a shareholder can enforce in court? How is it measured? For example, a company can buy credits from a wind or solar electricity generator that equal the amount of electricity used, but since power from renewables isn’t always available, that company will inevitably be using non-renewables to actually operate. Is that a violation of the carbon neutrality pledge? How do you factor in the carbon emissions from upstream suppliers in a place like China, which is massively increasing its capacity for generating electricity from coal?
The consequences for ESG words are increasingly becoming more threatening. There are NGOs that track corporate ESG promises, on the lookout for “greenwashing”,and there are, without a doubt, plaintiffs’ attorneys doing the same. The Securities and Exchange Commission has shown increased interest in the ESG commitments voluntarily made by businesses and is working on a rule to compel climate risk disclosures. The ESG statements that some companies may have intended as aspirational may soon become enforceable.
It is laudable when a business promises to do good. But as the saying goes, no good deed goes unpunished. Make certain your ESG commitments don’t set you up for problems down the road.
David Yaussy is environmental practice leader at Spilman Thomas and Battle and will present on May 3 at the West Virginia Manufacturers Association Manufacturing and Energy Summit in Wheeling, W.Va. (www.wvmegs.com)