The latest report on ESG from McKinsey carries some statistics which demonstrate clearly that whatever sceptics may say, But can ESG really work?
It’s without doubt that ESG is becoming much more important. For example, internet searches on ESG have grown fivefold since 2019, to some extent replacing searches for “corporate social responsibility”, which have declined. More than 90% of S&P 500 companies publish ESG reports in some form. McKinsey also cites the rapid growth in sustainable investment funds.
Another piece by McKinsey cites the intention of most business executives to build sustainability into new business. The piece identifies the resulting opportunities in several important basic industry sectors.
A step in the right direction
The measurability of ESG performance, while still nowhere near perfect, is improving. Meanwhile, there is a growing consensus about the inappropriateness – whether by corporations, governments or individuals (whether workers, shareholders or consumers) – of focusing solely on private gain, in a world where extensive damage has been done to societies and economies by a selfish, even egoistic political, social or economic focus.
John Donne’s much quoted Meditation of 1624, in which he proposed that “no man is an island” was never truer than today. Most people don’t realise that the next sentence of Donne’s work refers to land being washed away. How environmental is that! Donne was criticising isolationism and arguing for internationalism and the power of community, which is why the phrase resonates strongly today, as so many blogs, such as this one, demonstrate.
Learning from history
This historical concern with what economists call “externalities” is also referred to in the first McKinsey report mentioned above. The term was first applied to econiomics by the famous Cambridge Economist Alfred Marshall, in his book “Principles of Economics”, in 1890, but used mainly to explain technical aspects such as economies of scale and their consequences. It was developed and adapted in 1920 by his student, another famous Cambridge economist,
Arthur Pigou, in his book, The Economics of Welfare. Pigou is rightfully regarded as one of the fathers of what became known as “welfare economics”, where the word “welfare” is defined in the broadest sense, as the wellbeing of anyone affected by a given action, whether directly or indirectly. Young economists learn about this, not only in universities but also at A level. They learn to identify and quantify the “social costs” (and benefits) of any action – those that apply not to the company or consumer taking that action (the “private costs”), but to others. The examples used in teaching are usually environmental, such as pollution, noise, congestion and secondary smoking.
Fast forward to today
All these principles are widely used today, mainly in the evaluation of potential public investments and public policy, such as congestion charging, vehicle emission control, the evaluation of new transport infrastructure, and power generation. This demonstrate that the concepts behind ESG have a long and distinguished pedigree, one which has stood the test of time which may be used to help determine whether ESG is just a buzzword.
So can ESG really work? Quite simply, the term “ESG” simply encapsulates in practical terms what economists have long theorised about and what public sector economists have been applying for decades. The much higher visibility given to ESG performance and the pressure on firms to improve ESG performance, created by the focus of investment funds on ESG, is regarded by researchers at MIT as a very positive development which should be nurtured, though of course not uncritically. Meanwhile, the pressure exercised by the giant investors of this world will undoubtedly continue to push companies in the right direction.