Stirring up the debate was Tesla's declaration – in its recently released 2021 Impact Report – that current ESG evaluation methodologies are "fundamentally flawed".
What's more, shortly after launching its Impact Report, Tesla got booted from the S&P 500 ESG Index. Immediately, Elon Musk came out calling "ESG a scam". So what is going on here?
Tesla's Impact Report is a good starting point. They argue that at the moment ESG is generally deployed to measure Investment Risk. Its focus is on measuring the dollar value of risk / return. Is ESG merely an investor tool to figure out if an ESG issue impacts the profitability of a company?
Instead, Tesla argues, ESG should measure and scrutinize a company's actual positive impact on our planet. ESG should ask “Does the growth of this company have a positive impact on the world?”. This point reflects what Bloomberg reported on as 'ESG Mirage':
MSCI, the largest ESG rating company, doesn’t even try to measure the impact of a corporation on the world. It’s all about whether the world might mess with the bottom line.
The key question it comes down to is who are the actual 'consumers' of company ESG data, information, and credentials? Are investors the only ESG stakeholder?
No, ESG stakeholders are everywhere today, but the acceleration of ESG has been driven largely by the market (ie. investors), so the focus has been narrowly on investor risk – which is what ESG rating agencies measure.
More and more groups of people have a real interest in companies' ESG track records. Particularly the general public is starting to demand from the corporate world to do better business.
We, the general public, want to know if our energy is generated clean and renewable. If our shoes are not made with child labour and slavery in the supply chain. If the production of our food has not polluted or damaged the environment. If the help desk representative we speak too is paid equitably, treated fairly, and earns a living wage.
Above all, the foremost concern at large for most people is how a company is negatively or positively impacting climate change.
Today, ESG is truly a matter of public concern. It is not just sustainability-related financial disclosures for investors. ESG therefore should demand that companies think, measure, act and report their negative and positive impacts on the world.
A solar plant that uses child labour is bad ESG, even though renewable energy is good. An oil company with diversity, equity, fair work, no bribery, good governance, etc. demonstrates good ESG, even though the product contributes to climate change.
So, Elon is right that ESG is more than investment risk. However, he pushes ESG to the other side of the spectrum, arguing it should only report 'positive impact'. This polarization of the concept is far from helpful, ESG is neither only risk nor only positive impact. ESG ought to measure both investor risk and company impact – both positive and negative.
For Tesla, we need to understand how Musk runs his business. Tesla was booted from the S&P 500 ESG Index not because they question the methodology of ESG. Tesla’s management and workplace issues have been at times problematic. The company has been criticized for their codes of business conduct, racial discrimination, poor working conditions, and the lack of a low carbon-strategy.
That said, Tesla does have a point. ESG should not only measure investment risk but also report the long-term sustainable value a company creates for all stakeholders.
Back in the 1970s, Milton Friedman declared that "the business of business is business", meaning the only social responsibility of business was “to increase its profits”, which clearly no longer holds true. Today, value creation goes beyond maximizing profits.
This new way of thinking is accurately captured by the World Economic Forum's Chairman Klaus Schwab in this book Stakeholder Capitalism. Schwab formulates stakeholder capitalism as "a global economy that works for progress, people, and planet."
Capturing this Stakeholder Capitalism approach in an ESG framework, the World Economic Forum released their Stakeholder Capitalism Metrics (SCM) in late 2020. As a standardized and harmonized ESG framework, it measures companies’ progress toward environmental, social, and governance (ESG) metrics allowing them to optimize for more than just profits and report relevant information to all stakeholders – not only investors.
As such, ESG should be a tool to enable companies to report on their initiatives that mitigate negative impacts and create positive impacts in the world.
At Socialsuite we help companies navigate this complex and confusing ESG space. We have adopted the WEF Stakeholder Capitalism Metrics as today’s most standardized, harmonized and balanced set of ESG metrics. Starting your ESG journey by reporting on the 21 core SCM ESG metrics, gives you a balanced ESG sheet to serve all your stakeholders, including but not limited to your investors.
Personally, I love helping companies better understand the ESG playing field, the relevant metrics, and how to mitigate risk, identify opportunities, and create positive impact in line with their business models.
The world is watching and demanding action. Your stakeholders are expecting to see how you responsibly and transparently operate and govern your business. Drop me a note if you are ready to start your ESG journey and share your impact with the world.