Pirelli | ESG Isn’t What You Think. And It’s Not Going Away

This article was initially published on Inc.com |

It’s not a political platform or a savior. But it’s a crucial part of your business.

Much has been written about the pros and cons of ESG (which stands for Environmental, Social and Governance), what it is, whether it’s “woke,” and if that is a good thing or bad. ESG is under fire, both from political forces on the right who claim it is pushing a leftist political agenda, and from environmental and social activists who think it’s a distraction from the real work the world needs. These attacks aren’t warranted. ESG is neither a political platform nor a false savior.

What ESG Is and Isn’t

ESG is simply a process for gathering more information. It is technically a risk-assessment filter used by sophisticated financial analysts. These analysts know that more data and information reported by companies on every kind of risk and opportunity adds up to safer investments, and they therefore encourage more reporting. Information on the “G,” Governance factors, might reveal whether a company has the proper internal controls in place to avoid a money-losing scandal or compliance failure, for example. ESG ratings are an imperfect science, just as investment grade ratings sometimes fail to predict the collapse of a security. But ratings agencies do try to draw conclusions from whatever data is available.

ESG isn’t a movement or a woke religion or an attack on the oil and gas industry. In fact, oil companies are often leaders in reporting of ESG data to investors. ESG is also not a way to fix climate change, or a substitute for decarbonization policy or human rights legislation. It isn’t a solution for society’s ailments.

Who is Involved

• Companies: Companies don’t operate in a vacuum. In an increasingly complex world, companies will be increasingly held accountable for their impacts on society, for example, for the impacts of chemicals or packaging on the environment, for the impacts of their procurement practices on human rights, and so on. In a free market, companies need to have net positive impacts in order to be viable over the long term. Attention to ESG risk helps companies thrive.
• Investors: anyone can be an investor, and in a free market, investors can invest as they please provided they comply with the rules. Many investors prefer companies with greater focus on ESG, either because they appear better equipped to manage risk, or because they seem to be “doing the right thing,” which might also make them popular, and therefore a good investment.
• Fiduciaries: those responsible for other people’s investments have legal and moral obligations to minimize risk and maximize profits for their beneficiaries. Fiduciaries that take into account ESG risk have the obligation to do so only in the context of minimizing financial risk and maximizing financial gain.
• Voters and elected officials: Policy and rules should be determined through democratic process. Policymakers need to balance the interests of people as consumers, taxpayers, business owners, employees and citizens. Should we live in a society with clean energy? Should we deregulate and hope for low prices? Should we encourage reshoring of supply chains? Should we hold foreign companies to the same high labor and environmental standards we hold US companies to?

A group called “Conservatives for Clean Energy” believes that “Saving energy and taxpayer resources aligns perfectly with the goals of fiscal conservatism.” This is the kind of policy discussion that makes sense to keep in the political arena. Oil companies should not be the ones making energy policy: neither should solar energy companies, and neither should investors.

Responsible Lobbying

The concern that ESG could be a Trojan Horse for progressive policymaking is part of a wider concern over the power of special interests in society. Lobbyists can be useful in the policymaking process when they answer questions and provide technical information. But companies that lobby for their own interests to the detriment of society at large cross a line. For guidance, the UN Global Compact has offered a report called “Towards Responsible Lobbying,” the Public Affairs Council has a report called “Lobbying for Good,” and the University of Michigan’s Erb Institute has convened a task force on corporate political responsibility.

Companies should not set policy, but they do have the right, and the responsibility, to offer employees a respectful working environment and to protect and advance human rights in supply chains. Companies increasingly stand up for their employees’ interests in the face of political challenges, including taking public stands on social issues such as LGBTQ+ rights. This amounts to free speech and engagement, not policymaking.

For elected political leaders, the best way to exercise their right to set policy isn’t to crack down on ESG; it’s to set better boundaries around corporate money and influence in politics.

The questions raised by sustainability activists and by politicians concerned with corporate overreach are legitimate, and the question is how to address them. Companies need to do the hard work of sustainability, not just give lip service to ESG, including aligning advocacy with corporate strategy and values. And politicians should address the risk of undue influence overriding democratic processes by setting clear boundaries on engagement by unelected individuals.

Meanwhile, ESG isn’t going away. Serious companies will continue to report transparently on their risks and opportunities, particularly the environmental, social and governance ones. Serious financial analysts will continue to weigh these factors in their analysis. And retail investors and retirement savers will continue to benefit from the increased transparency.

Author:

• Maureen Kline, Vice President of Public Affairs & Sustainability, Pirelli Tire North America

Compliments of Pirelli Tire North America – a member of the EACCNY.