ESG is an acronym that is frequently floated around in HR circles, morphing – as it has done – out of CSR and DEI.
But while HR professionals have a big role to play in this, Rajeev Peshawaria, CEO of Stewardship Asia Center (SAC) Singapore, and founder president of the Leadership Energy Consulting Company, thinks the ‘G’ of ESG has become a big problem – because it is all about the behaviors of people in organizations – the part that HR folk have a big role to play in.
Peshawaria is already the author of numerous business books, including Too Many Bosses, Too Few leaders; Be the Change, and Open Source Leadership.
But to mark the publication of his latest tome – ‘Sustainable Sustainability’ – TLNT has this exclusive excerpt about why he thinks the ‘G’ of ESG is an issue, and why CHROs could be the right people to ensure corporate failures are no longer a failure of culture:
Everyone who works in HR will know that the basic framework of ESG (Environmental, Social, and Governance), has become a universal lexicon and scaffold for integrating environmental and social considerations into business operations.
The one problem it has always had, however, is its malleability. As a result, it spawned a spectrum of challenges.
A main issue here is the inherent dissimilarity amongst its components. The ‘E’ and ‘S’ of ESG represent critical, existential issues demanding immediate action.
The ‘G’ meanwhile, functions as a tool to address these challenges.
This incongruence should prompt a critical question – whether it is even logical to amalgamate these distinct elements into a singular framework. Because without questioning this, it’s precisely because this amalgamation that paves the way for greenwashing, with ESG ratings attempting to quantify the E, S, and G factors through intricate metrics, and with advancements in one area often masking detrimental activities in others. All-told this lead to misleading portrayals of a company’s overall impact.
Take Telsa, for example. The carmaker is included in many ESG-labeled funds. But observers point to potentially problematic S issues for the company relating to racial and sexual discrimination and child labor usage.
Ironically, CEO Elon Musk makes a counterpoint: “Exxon is rated top ten best in the world for environment, social & governance (ESG) by S&P 500, while Tesla didn’t make a list! ESG is a scam. It has been weaponized by phony social justice warriors.”
Therein lies it problem. In trying to employ sophisticated individual measurements, ESG rating frameworks reward disproportionately positive progress in one area, but can help hide the business’s harmful effects in other areas. As one US Securities and Exchange Commission commissioner observed, “One person’s eco-friendly windmill is another person’s bird killer.”
Over-reliance on the ‘G’
The one big problem of ESG is that despite focusing the business world’s attention on doing well by doing good, ESG has an over-reliance on “G’ to address E and S challenges.
The big question is this: Will G, in its current form of practice, be enough to solve for E and S?
There is another element to this too.
The ESG framework and G, rely heavily on rules, regulations, extrinsic incentives and measurement.
Such carrot-and-stick approaches are indeed required, but will they be enough to drive the extent of positive action needed to address climate change and income inequality? And how do we prevent misuse?
To answer these questions, let’s look at three recent stories:
Boeing 737 Max
Despite stringent regulations, Boeing’s compromised safety and engineering standards during the 737 Max development led to two catastrophic crashes within five months, highlighting significant oversight and regulatory failures. This raises urgent questions about how such disasters occurred under existing safeguards and what measures are needed to prevent future occurrences.
Volkswagen’s ‘Dieselgate’ scandal
The Volkswagen Dieselgate scandal in 2015 exposed the company’s use of defeat devices to circumvent EPA emissions tests, resulting in on-road emissions vastly exceeding legal limits. This pattern of unethical behavior, with previous instances and substantial financial penalties, raises questions about the effectiveness of regulations and the role of financial and competitive pressures in corporate misconduct.
Theranos: A case of purpose-washing?
Elizabeth Holmes, founder of Theranos, was sentenced to over eleven years in prison in 2022, for defrauding investors and regulators about a revolutionary blood-testing technology that failed to work. Despite early intentions to innovate in healthcare, her refusal to acknowledge the technology’s flaws led to massive fraud, culminating in her downfall when whistleblowers and investigative journalism exposed the truth. It raised questions about the oversight and ethical lapses that allowed the deception to persist.
Examining the ‘G’ problem
So what was common in the three stories?
Most would say that it was poor corporate governance and a complete failure of compliance.
If this is the case, we have a huge problem because boards spend most of their time on risk management and regulatory compliance.
A few years ago, my colleagues and I surveyed board directors across the ASEAN region at the Iclif Leadership and Governance Centre (now part of the Asia School of Business – a collaboration between MIT Sloan and the Central Bank of Malaysia).
We wanted to know what activities corporate boards spend most of their time on.
Not surprisingly, sustainability, culture, strategic innovation and leadership/talent issues were reported as ones on which they were not spending enough time.
From my experience working with boards globally, I find that the ratio of this time allocation does not change much across geographies as compared to the ASEAN data above.
Since Covid, there has been some increased focus on environmental and social sustainability in boardrooms, but the G of ESG still largely comprises providing financial oversight, ensuring regulatory compliance and managing risk.
So, if a majority of time is spent on providing oversight and compliance, how do boards miss fiascos like Boeing’s 737 Max, VW’s Dieselgate and Theranos?
And, even if boards were more effective in preventing scandals, would that help adequately address our existential challenges?
The need for the right incentives and deterrents
Let’s assume every company and every individual fully follows the letter of the law when it comes to environmental and social responsibility.
Would that result in humanity overcoming climate change and socioeconomic inequality?
Many management experts argue that it’s incentives and deterrents that drive really behavior. So, they insist that organizations and governments must provide the right incentives and deterrents.
Incentives can be rewards for good behavior, such as tax breaks for going green. Deterrents can be in the form of strict laws to book bad actors, like penalties and imprisonment for creating pollution or willfully deceiving investors and regulators.
Coming back to the point about whether the three stories were the result of poor compliance and governance, here is what Andy Fastow, the former CFO of Enron, had to say:
“Many people believe Enron was a failure of compliance. I disagree. What Enron was . . . was a culture failure. It was a culture of loopholes where the principles didn’t matter, only technical adherence to the rules.”
As reported on the website of the University of Calgary, Fastow said this while speaking at the Canadian Centre for Advanced Leadership in Business in 2019.
Holding up in one hand a CFO-of-the-year trophy given to him by CFO Magazine during the heydays of Enron and his prison card in the other, he added:
“How is it possible to be the CFO of the year and commit the greatest corporate fraud in American history for doing the same deals? . . . Every single deal I did was approved by Enron’s accountants, by the outside auditors, by Enron’s attorneys, by Enron’s outside attorneys, by the bank’s attorneys when appropriate and by Enron’s Board of Directors.”
We have a big G problem
If Fastow is right about the failure of culture, principles and values, then we clearly have a big problem — a G problem!
While we need rules, regulations and compliance, there is no guarantee that bad behavior will be eliminated from society.
There is even less guarantee that adequate good behavior – the amount and extent of proactive action required to save the planet – will occur.
What good regulation and governance do is this: They provide a baseline for good behavior. [ie “Thou shall be punished for breaking the law.”]
But it does not ensure good behavior.
Complying with the law may keep someone out of trouble, but it does not motivate them to do good.
At best, it keeps them from doing harm.
And as demonstrated in the cases of Fastow and his colleagues at Enron and all the great minds at Boeing, VW and Theranos, regulations did not even achieve that.