Book review: Measuring Good Business - Chap. 2

Book review: Measuring Good Business - Making Sense of Environmental, Social and Governance (ESG) Data - Chapter 2 - ESG World

In my introductory post, I explained that I have endeavored to summarize key insights and takeaways from this book (which I highly recommend) in five weekly posts, each one corresponding to a different chapter. This week is Chapter 2: ESG World.

(I offer my gratitude to the author Richard Hardyment for his thorough research and captivating narrative.)

This chapter is about describing how ESG World came about, what it has become and where the disconnect arose between ESG and sustainability.

Before going any further, it’s helpful to know that the author uses the term ESG to refer to “the catch-all interest from finance and business in environmental, social or governance criteria”, otherwise known as issues that matter financially. By comparison, the author uses responsible business and sustainable finance to refer to “an incredible journey towards the long-term, intergenerational and shared stewardship of social, environmental, ethical and economic impacts and dependencies”, as well as the values and culture that underpin actions to shape the world around us, which he calls “ethical materiality”.

The author explains how the term ESG was popularized in 2004 in a report called Who Cares Wins (where does the term ESG come from?), which recognized the rising investor interest in the link between ESG issues and overall management quality. It identified an investment rationale that according to the author represents a departure from the past (when the economic advantage of responsible business what that all businesses benefited collectively and the system was rewarded through shared, voluntary action, as described in Chapter 1) whereby individual firms could outperform from properly addressing their ESG issues – creating alpha returns beyond market (beta) returns. ESG was touted as a corporate value driver, which fit well with the dominant narrative of maximizing shareholder value that had emerged in the latter part of the 20th century. The rise of ESG further coincided with the aftermath of the great financial crisis of 2007-2008, and literally exploded starting in the 2010s. 

In other words, while the business case for sustainability had been around for decades, the advent of ESG made the focus for tackling sustainability about financial motives: “In today’s ESG World, the case for everything is almost exclusively focused on the interests of capital markets for better risk-adjusted returns.” [...] The sacred foundation stone of ESG World is the idea that it makes money.”

But the author points out that the overall goal of those who pioneered the concept in 2004 was misconstrued; Who cares wins had two objectives. The first was to make the business case at the level of the company. The second was that by integrating ESG, investors could contribute to the sustainable development of the societies in which they operate: “So the ambition of the whole concept, right at the start, was not just to generate better financial returns. It was for commerce to play a broader role and also contribute to societal outcomes. This was very much in keeping with the language used for most of the last 4,000 years around recognising the complex impact and social responsibilities of commerce.”

Something got lost in translation. In the ESG World, the mainstream financial community chose to focus only on the first objective – what’s more, with opaque ESG ratings that aren’t measuring the right things nor measuring them correctly – while claiming to be addressing the big challenges facing our planet. This created a disconnect between how ESG integration was actually practiced and the claims being made, by both investors and companies, about achieving any degree of sustainability… a disconnect we now call greenwashing. ESG World is “an exhilarating land of eye-catching launches, bold promises and lots of talk about how finance is making a difference for people and planet”.

This co opting of the original concept of ESG also had repercussions in terms of the performance measurements being used and the data being collected: “the machinery [of ESG World] powering the merry-go-round is not configured to make a difference. [ESG has] been co-opted to describe everything and anything: screening, tiling, excluding, assessing, engaging, scoring, voting, valuing” [...] definitions [are] hazy, metrics [are] vague, data [is] imprecise. [...] The definitions, data, processes and metrics are so fuzzy and malleable that they have succeeded in making the entire concept meaningless.”

Perhaps more importantly, the phenomenal popularity of a co-opted concept of ESG is leading us astray of the ultimate goal of addressing our systemic dysfunctions and achieving a state of sustainability: “the whole project of responsible business and sustainable finance is at risk if we don’t address the fuzzy definitions, the false claims, the sloppy measurement, the hazy numbers.” The end of the chapter brings us closer to the ultimate destination of the book:

“We are left with a tension. ESG World would benefit from tight definitions and shared standards to prescribe the words and define comparable metrics, flushing out the greenwashing and holding corporates to account. Yet the nuance of the issues and diversity of the users mean that measuring sustainable business is not prone to simplification. Even if we can harmonise the basics of what companies measure and report on, we won’t all agree on what “good” looks like. To see why, we must now turn our focus to measurement and ask: how far can we really capture the reality of a business’s impacts on the world?”

Introduction

Chapter 1 - Moral Merchants

Next up: Chapter 3 - Good Measurement

About the book

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