ESG – the re-branding of the defunct corporate social responsibility concept

The Environmental, Social and Governance (ESG) reporting initiative is a valueless concept, much like its predecessor CSR (Corporate Social Responsibility.) These concepts are fundamentally flawed as they ignore an elementary requirement for their success. They are ploys to make us believe serious problems are being addressed, when in reality, their purpose is the complete opposite, to delay and frustrate change.

Exaggerate Their Ethical Behavior Corporate Social Responsibility

Free-Photos / Pixabay

Don’t get me wrong – I believe in the protection of our environment and society. They are critically important, and in part, achieved through rigorous business governance. So the common-sense principals of ESG should be lauded. The reasons I show no faith in this “new initiative” is that it represents nothing more than the re-branding of the defunct CSR (Corporate Social Responsibility) initiative. This re-branding is an attempt to revitalise old, failed ideas and to keep alive the notion that our problems are being addressed when in reality they are not; it won’t result in any favourable change of any kind, as I explain in this article.

Get Our Activist Investing Case Study!

Get the entire 10-part series on our in-depth study on activist investing in PDF. Save it to your desktop, read it on your tablet, or print it out to read anywhere! Sign up below!

We have been talking about a balanced approach to business governance for over four decades, but where has it got us? CSR was introduced over three decades ago to address the same issues ESG professes to do today. However, being brutally frank, CSR has been a dismal failure; so to have other attempts to provide balanced governance. Current efforts in the form of IR (Integrated Reporting) where disparate reports are cobbled together with financial reports, are proving no more successful, and will never be successful. The reason for this is an oversight of an elementary kind.

Corporate Social Responsibility: A marketing scam?

This was demonstrated in the demise of perhaps the most successful attempt ever at introducing a balanced approach to business management - The Balanced Scorecard. Although it did well among large corporations in the late 1990s, it was doomed from inception for numerous reason. However, the most important reason for its failure is identical to all other efforts, such as CSR and IR (and soon to be added ESG.)

While financial measures remain our sole, universally applicable measurement standard, businesses are forced to produce strong financials because that’s how the outside world evaluates their worth. Other measures, particularly those who are incomparable with other businesses, even businesses from the same sector and of the same size, render them valueless to the market. Consequently, businesses focus on producing strong financials, despite these decisions been counterintuitive to the recommendations of other measures, which focus on long-term profitability and sustainability.

While financials measures remain the dominant measure, it becomes a futile effort to spend too many resources gathering and focusing on measures which will be ignored in favour of producing strong financials. That has not stopped most large corporations seizing on the PR opportunities corporate social responsibility  offered them to promote a false image of their stewardship. This is because there are no universally accepted standards and oversight in measuring non-financials.

Corporate Social Responsibility and the pressure for investor returns

The key to addressing the problem of providing a balanced management approach is to have an integrated, universally applicable measurement standard measuring the needs of all stakeholders. Until then, whatever we do or say is a waste of time. This is the elementary solution which is continually overlooked. It’s elementary because what else can we expect if we only measure financial outcomes? Therefore, those who ignore this basic requirement are engaged it nothing other than cheap talk, intended to delay progress towards balanced measures. For people, like myself, who have spent considerable time investigating our measurement needs, the solution is not as complex as vested interests in maintaining the status quo would have you believe.

The financial elite knows they are in a corner and must change but don’t want to, as they understand change will be radical, adversely affecting their future wealth. The best method to delay change is to acknowledge the need for change and then to talk vaguely of how you are going about making the change.

This lulls people into a false perception that something is being done when it’s not. They need to put out a message that they appreciate the problem, and are doing something about it. They can’t use corporate social responsibility as it has been flogged to death. People have lost faith in it. Therefore they repackage the same ideas under a new name (ESG) and try and flog it, showing how they understand the problems and are doing something about it when in reality, they have no desire to do anything whatsoever.

CSR and pointless organisations

Another example of this deception whereby organisations acknowledge the problem then tender vague solutions to purposely delay change was demonstrated at the World Economic Forum in Davos in 2019. At this meeting, they restated the purpose of business was to serve the needs of all stakeholders. On the surface, this appears a radical turnaround from “shareholder theory” to “stakeholder theory.” Again, this is only cheap talk because to be able to achieve this, they need an integrated, universally applicable measurement standard measuring the needs of all stakeholders. They know this, but no commitment was made to make the investment in research and development. It wasn’t even discussed.

Do you believe all these economic brains have miraculously overlooked this need?. Of course not. They have employed the same strategy of acknowledging and talking about the problem and how concerned they are about it, but they will take no concrete steps to address the problem. With all this positive talk, people think they are on their side and are doing something about it when they are not.

Until we change our business measurement standard, nothing changes. The financial elite knows this only too well. Such a change will involve the fair and reasonable distribution of value - value they have hoarded up until now. They aren’t going to change - it will require public awareness and anger with the unfairness of the situation, which will hopefully result in government intervention, leading to change. Unfortunately, the clock is ticking as our environmental time bomb is linked to this change.

Copyright © 2019 Adrian Mark Dore
adrian.dore@growingvalue.net



About the Author

Adrian Dore
Adrian Dore has over forty years experience as a business owner, corporate executive and adviser. He has worked for, and with diverse businesses in equally diverse roles. This has given him a wealth of experience and knowledge. However, he has always been interested in understanding how businesses go about creating value; the underlying processes and their interrelationships, which he has spent the past twenty years researching and understanding.