ESG as easy as $*&%@
ABC, as easy as 123, so goes the song. That is not true for this acronym.
The International Federation of Accountants reports that “93% of firms use a mix of ESG standards, thwarting uniformity efforts.” This figure has grown from 60% in 2019. Why is that a problem?
🚦 Without consistent standards, we can’t compare data reliably.
🚦 This inconsistency creates space for creative reporting on ESG.
🚦 Some measurement tools focus on financial materiality, others on societal impact.
That last point is very problematic. ESG is a already a broad church of issues where organisations create impact and are themselves impacted.
Let’s use an example from just one topic—worker welfare. A retailer may squeeze a wholesaler on price. That wholesaler pushes the lower costs down to the local manufacturer, and they then decrease the price they’ll pay for raw materials. In this pervasive pattern, many possible materiality and impact issues exist. For starters:
SOCIETAL IMPACT
👉 Child labour (cheaper)
👉 Child labour (parents cannot afford school/childcare)
👉 Longer hours, leading to an increase in safety and health issues
👉 More expensive sustainable material swapped out for cheaper (and more damaging) alternatives.
👉 Move workers from permanent to temporary contracts (less benefits/costs) leading to strikes
👉 All of the above exacerbates poverty and income disparity, culminating in civil unrest
FINANCIAL MATERIALITY
👉 Inferior products (overworked/underqualified workers) leading to higher returns
👉 Inferior products leading to liability issues (dangerous)
👉 Inferior products leading to brand damage
👉 NGO or media reporting of exploitation, leading to boycotts, share price dips, etc.
👉 Suppliers fail to deliver or go out of business (business interruption, lost sales, etc.)
👉 Regulatory investigations (e.g., Modern Slavery Act)
Most ESG reports and analyses don’t go to these levels, but you see the problem. What are we trying to ascertain? By fixating on different measurement methods, we’re (potentially) missing the supposed point (improving environmental, social, and governance issues). While we wait for a consensus on how to measure (which will likely be imperfect, contested, and unevenly applied), might we ask better questions?