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Reasons why

 

Monitoring sustainability

Three changes are needed to maintain precision in environmental, social and governance activities as the ESG pace quickens, says Hannah-Polly Williams, a recent Executive MBA participant at Cambridge Judge Business School, who studied these issues for her Individual Project as part of her EMBA programme.

In the style of paper cut art, a panorama of trees, wind turbines, houses and hills, with a bicycle in the foreground.

Companies, investors and policymakers are paying increased attention to environmental, social and governance (ESG) issues – and that is to be applauded. Yet as the pace of ESG activity quickens, there are concerns whether this momentum is leading to truly sustainable outcomes or immaterial results shrouded in the expediency of sustainability rhetoric.

There are therefore three changes society can make now to help maintain precision in sustainability outcomes as the pace of ESG activities continues to build, as I outlined in a paper – “ESG’s impossible equation? Introducing the Precision-Pace framework” – that I wrote for my Individual Project, part of my just-completed Executive MBA programme at Cambridge Judge Business School. The project was supervised by Shazhad (Shaz) Ansari, Professor of Strategy & Innovation at Cambridge Judge.

Firstly, it’s important to retain a strong role for ESG and sustainability experts as activities become more mainstream. The more ESG considerations are mainstreamed within a company, particularly at management level, the greater the chances that these activities will be successfully delivered. We need to avoid overly simplifying ESG and sustainability work in a way that yields imprecise and simplified activities – thus underlining the important role for ESG and sustainability experts to lead the discussion on the nuances, perverse incentives and traps of immateriality which need to be avoided.

Secondly, we need to better educate consumers about ESG issues. There is currently a disconnect between the high enthusiasm of consumers to support ESG activities and their lower level of knowledge about what doing so entails.

This creates unreasonable pressure on businesses and investment firms, amplified by the mainstream media, to deliver ESG outcomes without high-level understanding that ESG portfolios may, for example, still invest in oil and gas companies – and that if they wish to make a positive contribution to society, there may need to be a willingness to deprioritise financial returns. Even the distinction between ESG, which avoids negative impacts, and sustainability, which contributes positively to society, are not well understood. Managing consumer expectations is extremely difficult to achieve, particularly in this era of fake news – so the ESG and sustainability ecosystem will need to ensure they train consumers to ask the right questions about how companies measure and track progress to ESG and sustainability outcomes.

This leads to a third recommendation, that the various organisations focusing on ESG issues set common standards and create platforms to share best practice. These organisations – including Sustainability Accounting Standards Board (SASB), Principles for Responsible Investing (PRI), Morgan Stanley Capital International (MSCI) and Sustainalytics – are critical and well-known to professionals, but consumers would benefit if they coordinated further to sign-post common standards rather than each seeking to create a full suite of standards and services. At the same time, international coordination should also be enhanced – because it’s critical that big economies such as China, Brazil, Russia and large African countries such as Nigeria and Kenya help to create a race to the top in terms of ESG awareness and action.

While maintaining the current pace of ESG progress in future years is welcome, stakeholders should pivot from our current trajectory to ensure that systems and infrastructure built by the ESG and sustainability community are both precise and developed at pace. The three steps outlined here will help ensure such a balance, and in the medium term we may need to put the brakes, temporarily, on the current pace of progress.