Situational Summary
The victim is an 18-year-old acronym. Rumors of its demise began circulating when media reported in early August that ESG references had disappeared from certain McDonald's web pages. This coroner's inquest report presents preliminary findings as to the manner, cause and parties culpable for ESG's death.
Manner of Death
Accident. No one killed it, nor did it kill itself. The evidence suggests ESG died from toxicity and dysfunctionality. Culpable parties include investors, fund managers, corporate communicators and politicians.
Investors and asset managers, for example, attached it to investment opportunities that furthered the aims of the ill-defined term “sustainable investing.” From a base of zero in 1995, they attached it to $17 trillion in equity assets — 25% of the investible pool in the United States by 2020. Whistleblowers alleged that asset managers misused it. Corporate communicators greenwashed with it. Executives were compensated for implementing it. Bond rates were set by it. Regulators wanted compliance with it. Litigators exploited it. Politicians weaponized it.
Cause of Death
Toxic Label Syndrome. ESG's abandonment was preceded by a conflict between ambiguous moral priorities and unambiguous financial priorities, becoming progressively toxic and dysfunctional and precipitating its downfall from the communications lexicon. AB InBev, Vanguard, DocuSign, BlackRock, Qualcomm and Blue Apron, in addition to McDonald's, are among the many firms called out for scaling back their ESG postures in what is being called “green hushing.”
Background
ESG was a confused acronym from the outset, stepping in to fill a need expressed by investors for company-specific, forward-looking information not evidenced in corporate financial statements. But when it was first coined by law firm Freshfields Bruckhaus Deringer, it was within a legal framework commissioned by the United Nations environment program to help institutional investors such as pension funds and insurance companies legally integrate environmental, social and governance issues into their investment decision-making and ownership practices.
Embedded in the report was a risky moral time bomb: a remit to trade pure economic gain in an investment fund to prevent deterioration of “the society in which [investors] are to enjoy retirement and in which their descendants will live.”
Investors wanted objective and consistent visibility into company culture and reputation as predictors of future performance, including the impacts and costs of ESG. To help them rank the moral value gained in this economic trade-off, industrial-grade ESG ratings appeared. However, ratings on those topics were controversial even before they spawned today's political backlash. Much has been written about the uneven complexities of deciding what factors to include in the metrics and how to value them. Unresolved conflicts arose from trying to compare ratings within and across industries.
Critics saw them as moral absolutes posing as market metrics, swapping correlations with performance for causal proofs. Do better ratings improve company reputations or are they the result of them? Was a higher rating a reliable indicator of reputation resilience and future performance or was it puffery?
Coroner's Analysis
The topics within the purview of ESG metrics are incredibly important. They're legitimate prompts for business operations and will continue to impact performance and future prospects.
ESG could have been a dispassionate measure of corporate factors not evidenced by financial statements. But ranking its morality value made it the wrong answer to the right question, precipitating its accidental death from Toxic Label Syndrome.
The solution? Businesses and their stakeholders, both direct owners and those impacted by corporate behaviors, deserve a tool that makes tangible what financial analysts blandly termed “extra-financial information.”
We need a dispassionate measure of corporate factors not evidenced by financial statements or biased by competing and changing definitions of morality. That solution is to objectively measure corporate reputation as a metric of resilience in a world in which we expect more from the businesses in which we invest and work, and from which we purchase.