The Crucial Points Missing from ESG Critics

What is a cynic? A man who knows the price of everything and the value of nothing.”

Oscar Wilde

Recently, the idea that investment funds do good in the world by using their considerable influence to steer the for-profit companies in which they invest towards the fight against the ills of society has been the subject of news and harsh criticism.

Arizona’s attorney general, along with attorneys general from 18 other states, has written an open letter to BlackRock, the world’s largest asset manager, suggesting that its reliance on environmental, social and governance (ESG) criteria ) in its investment decisions places the funds it manages for its clients (including many state employee pension funds) with unnecessary risk. The Wall Street Journal’s editorial board co-signed this position in an “I told you so” style op-ed titled “The ESG Investing Backlash Has Happened”. Florida Governor and potential Republican presidential candidate Ron DeSantis has even publicly introduced new legislation prohibiting Florida public fund managers from considering ESG information when investing public money.

For three years now, the MIT Center for Transportation & Logistics and the Council for Supply Chain Management Professionals have conducted an annual survey of global supply chain managers regarding their companies’ sustainability efforts. From what we see in the research, what the critics of ESG investing have right is that (1) investors are one of the main drivers of pressure on companies to improve their sustainability, and (2) that “sustainability” means very different things to different people.

From 2020 to 2021, we observed that investors were by far the fastest growing driver of sustainability pressure on companies. At the same time, the understanding of what exactly ESG and supply chain sustainability entails changes depending on the geography, industry and year we pose. For example, is corporate sustainability simply climate change mitigation, or does it also include the protection of human rights and diversity, equity and inclusion? Simply put, executives and investors around the world disagree on what corporate sustainability entails and how best to put it into practice. In this sense, it is therefore reasonable to assume that some companies could feel pressure from investors directing them towards an ESG vision that seems foreign or unclear to them.

But thinking about it more deeply, this criticism misses two important points. First, the fact that these critics themselves disagree with the prioritization of ESG measures by BlackRock or others – or can imagine voters or readers who might disagree – does not in itself merit rejection. total from investors. Nor does it deserve, as some ESG critics suggest, a resolute return to the exclusive priority of net profit.

Individual attitudes towards ESG and sustainability aside, inattention to supply chain sustainability leaves for-profit companies vulnerable to specific types of public relations disasters and disruptions. of the supply chain that ESG and sustainability efforts strive to eliminate. It is human rights scandals and environmental transgressions that grab headlines, diminish brand value and negatively affect both stock price and continuity of supply. Critics who only see the cost of ESG efforts to the company are in that sense too myopic for modern practice. They fail to see that it is possible to make a strong claim that supply chain sustainability efforts actually protect a company and its brand, and therefore its investors. ESG investing is, in this sense, practical insurance, not noble banter as the growing chorus of ESG critics suggests.

Second, while the cynics are correct to point out that sustainability priorities change over time – our survey clearly confirms their observation here – it is not necessarily correct to imply, as the cynics have, that this transience reveals that ESG and sustainability goals are themselves some sort of minor scam. Harsh critics like the Arizona attorney general cite the example of European governments now renouncing their coal and nuclear shutdowns for environmental reasons to prepare for the threat of Russia giving up its natural gas for heating this winter. This unfortunate geopolitical consequence of Russia’s invasion of Ukraine is being held up by cynics as sort of proof that ESG stuff is just fluff and has no substance when it comes to pushing. But this is an incomplete picture of how sustainability efforts seem to be affected by the crisis.

Over the past two years, our research has directly asked supply chain management professionals around the world about the impact of the COVID-19 pandemic on their commitment to supply chain sustainability. supply. For two consecutive years, approximately 80% of respondents have responded that their company’s commitment to supply chain sustainability has remained the same or even increased during the global pandemic. In interviews with leaders, we heard repeatedly that the COVID-19 crisis has brought important new opportunities to redesign old systems. In times of crisis, prudent managers adapt and innovate with sustainability and resilience in mind. Of course, European governments are currently blocking their coal shelving plans. But they are also taking unprecedented steps to rationalize their overall energy demand by identifying and eliminating unnecessary consumption where they can. ESG critics misinterpret the signals here, misinterpreting helpful adaptation and innovation as weakness and capriciousness.

In any disagreement, it is important to grant your interlocutor the good faith of his point of view. Or, as the 2nd-century Roman emperor Marcus Aurelius said in his Meditations, “take into consideration…that no one willfully does the wrong thing.” I certainly hear the same grace here and freely admit that the critics are right about the vexing ambiguity of “ESG” and sustainability. But at the end of the day, we all share the same fate: stuck on this perilous planet, hoping that our ecosystems and retirement plans will suffice for the rest of our mortal lives.

I’m sure even those with whom I disagree on this point share my hope that what we have now will also survive future generations of all our loved ones. Based on the extensive data that I have personally collected and analyzed, it is clear that ESG investing is an important – albeit perhaps imperfect – tool to help us achieve this kind of long-term sustainability.

David HC Correll, Ph.D. is a research fellow at the MIT Center for Transportation and Logistics (MIT CTL) and principal investigator for The State of Supply Chain Sustainability, an annual report co-presented with the Council of Professionals in supply chain management (CSCMP). These opinions do not necessarily reflect the views of MIT CTL, CSCMP, or the report’s sponsoring companies or project personnel.

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