08 Aug Is ESG Inevitable?
The following commentary/analysis is one I wrote in my capacity as a senior fellow at “the nation’s oldest consumer protection agency,” Consumers Research, where, among other things, I compile a weekly letter for public pension-fund managers. I am sharing it here today because I thought it might be useful to some of you.
ESG Is a Luxury Belief
While the effort to push back against ESG appears to be succeeding far more than expected in investment management and public perception, the implementation of ESG-related policies throughout corporate America nevertheless continues unabated. Those who believe that ESG is a distraction and a violation of fiduciary duties have convinced everyone that they have a strong argument – everyone, that is, except the corporate decision-makers who have to deal with sustainability-obsessed bureaucrats in Washington and especially Brussels. They think that implementing ESG is essential, or at least they behave as if they do:
[A] significant number of companies are integrating sustainability into their strategies. According to Deloitte’s 2024 “Sustainability Action Report,” over 75% of executives have seen progress in their sustainability goals.
Companies are enhancing their ESG capabilities, with 99% preparing for increased sustainability requirements and 77% creating new roles. The rise of ESG controllers and increased involvement of CSOs and general counsel highlight the strategic importance of ESG.
“Regulatory requirements and the evolving risk landscape have prompted many organizations to fill sustainability experience gaps in the C-suite, boardroom, and beyond,” notes Evan Harvey, Audit & Assurance managing director, Deloitte & Touche LLP.
This is interesting but troubling. It raises several concerns, all of which can be seen as warning signs that American business still fails to understand ESG and its impact and is, as a result, flirting with long-term profitability impairment.
The first of these issues stems from the source of the research here, Deloitte Touche. Deloitte and the other members of the Big 4 are, perhaps, the biggest, most interested stakeholders in the ESG debate. They stand to make billions off ESG’s implementation and lose those hypothetical billions if ESG is not implemented. They’re almost literally salivating at their good fortune, as Daniel Hood noted recently in Accounting Today (h/t Andrew Stuttaford):
In accounting, though, hundred-year floods have actually turned out pretty well. Just over a hundred years ago, in 1913, the introduction of the federal income tax created a huge demand for the tax preparation services that are practically synonymous with the modern profession. And just under a hundred years ago, laws passed in 1933 and 1934 in the aftermath of the stock market crash that launched the Great Depression mandated the second of the profession’s primary offerings — the public company audit.
Recent explorations of ESG rules at the Securities and Exchange Commission, in California, and in the European Union are just the first tricklings of what’s going to become a flood of mandates for companies everywhere to report on the impact they have on the world around them — and they’re all going to need help setting up their reporting systems, and then proving that those systems are accurate going forward. Over the next decade, the scale of the need for these services will grow to at least match that for financial audits, and could potentially be much, much larger.
Deloitte has skin in this game, in other words, a LOT of skin.
Ironically, then, a second issue is one openly conceded by Deloitte: the sustainability data currently being collected is, quite often garbage:
Even as many companies continue to invest in resources and infrastructure to strengthen strategic focus and reporting processes and controls, additional complexities often become more visible, such as industry or geographic-specific considerations, consistency in application of measurement methodologies as reporting standards continue to evolve, and a deepened understanding of assurance considerations, among others. More than half of executives (57%) cite data quality as the top ESG data challenge for their company, and a majority (88%) report it as one of the top three challenges for their company. Most executives (81%) also report challenges related to documentation in their top three.
Oh.
So…they’re spending billions collecting data that is, in many cases, useless, making its collection a waste of time and (shareholder) money? That seems rather foolish.
Finally, all of this raises the issue of whether ESG might be such a potent distraction that it prevents corporate leaders from focusing on their real duties, namely ensuring that their companies function well and produce results for shareholders and other stakeholders, including employees and customers.
Not quite 18 months ago, in the wake of the collapse of Silicon Valley Bank, I first suggested that ESG is a “luxury belief,” a byproduct of the easy money and seemingly endless good times promoted by the Federal Reserve’s decade-plus-long policy of near-zero interest rates. ESG, I argued, was an extravagance in which corporations and investors could afford to indulge when it was possible to make money doing or investing in anything, but that its problematic nature would become clearer and clearer as both Fed policy and the broader economy succumbed to reality:
ESG is what one might call a “first-world problem.” It is an indulgence, something that occurs on a mass scale only when times are good and money is plentiful for such extraneous, non-functional business expenditures. ESG’s defenders like to say it is a “risk-management” tool, a mechanism by which investors can evaluate long-term energy and reputational risks. Whatever one thinks of this argument (I wrote a whole book debunking it), in the short term, ESG is nothing more than a distraction, a shiny bauble that keeps corporate executives from doing what they’re supposed to be doing and that, as a result, contributes to the modern-day bezzle….
The biggest reason SVB (and countless others like it) dedicated so much time and so many resources to ESG, however, is because they could—because the Federal Reserve’s interest rate policies over the last 15 years enabled them to do so. ESG is part of a wild and distressing pattern of misallocation of capital for non-pecuniary purposes that constitutes a genuine culture of corruption throughout American business today.
Today one of two things is true: either the Fed will maintain interest rates “higher for longer,” or the Fed will cut in the face of a profound economic slowdown. In either case, the “good times” are largely over, as is the ability to continue to maximize profit while still misallocating resources to non-pecuniary indulgence projects.
In short, ESG may be something about which American business officials obsess, but if that is, indeed, the case, then they do so in contravention of their obligations and duties as the agents of the shareholders.
As the editorial board of The Wall Street Journal noted the other day, “a reckoning for a decade and a half of excessive spending and easy money…is going to arrive eventually.” When it does, either ESG will be jettisoned from the list of corporate obsessions or corporations will dramatically compromise profitability to avoid having to do so. Either way, executives shouldn’t get too comfortable with what Deloitte reassures them is the emerging corporate order.
