Does ESG Really Matter—And Why?
Although valid questions have been raised about ESG, the need for companies to understand and address their externalities is likely to become essential to maintaining their social license.
Criticisms of ESG are not new. As ESG has gone mainstream and gained support and traction, it has consistently encountered doubt and criticism as well. The main objections fall into four main categories. 1. ESG is not desirable, because it is a distraction. 2. ESG is not feasible because it is intrinsically too difficult. 3. ESG is not measurable, at least to any practicable degree. 4. Even when ESG can be measured, there is no meaningful relationship with financial performance.
Accordingly, the responses to ESG critics coalesce on three critical points: the acute reality of externalities, the early success of some organizations, and the improvement of ESG measurements over time. And the case for ESG cannot be dismissed by connections between ESG scores and financial performance and changes in ESG scores over time.
While the acronym ESG as a construct may have lost some of its luster, its underlying proposition remains essential at the level of principle. Names will come and go (ESG itself arose after CSR, corporate engagement, and similar terms), and these undertakings are by nature difficult and can mature only after many iterations. But we believe that the importance of the underlying ideas has not peaked; indeed, the imperative for companies to earn their social license appears to be rising. Companies must approach externalities as a core strategic challenge, not only to help future-proof their organizations but to deliver meaningful impact over the long term.