The Death and Future of Ethical Business: ESG

Environmental, Social, and corporate Governance (ESG) is a concept that has undergone a massive surge of interest in the corporate world for the last couple of years. ESG composes the 3 main pillars of corporate sustainability, that evaluate firms' business practices based on an ethical perspective. The ESG report is used in an attempt to restrain corporate corruption ranging from pollution, human right violations, and an overall dismissal in ethics. The report is also utilized as a tool for firms, as a favorable report score increases attraction from investors, customers, and employees with their high ground in social responsibility and performance. (Mathis) However, this sustainability framework was recently criticized for their critical shortcomings.

 

ESG characteristically combines 3 separate factors of environment, society, and governance into one singular scoremark. Due to the nature of these vastly different sectors, measuring these include "different methodologies, metrics, weightings and subjective judgment in ESG ratings (Laidlaw) This leads to widely different scores for the same firm, and even different interpretations. For instance, the data may be assessing a company's exposure to water shortages, while another a company-specific one such as which directors generate more expertise. (Laidlaw) Thus, some ratings are more effective on gauging financial risks and company performance than others, contributing to the unreliability of ratings.

The strong favorability towards an ESG approach compels firms to prioritize this mode, yet this may not be sustainable for companies long term. Some scholars argue that ESG investment has a negative impact on profitability or firm value. This is reasonably predicted as investing in this business model causes reallocation of funds to other stakeholders from shareholders, ultimately leading to a negative impact on firm financial performance. (Aydogumus)

The final factor is scrutiny of ESG reports over the manipulation from firms. As the ESG reports have gained tractions over the years, more and more firms are prone to forging  documents or adjusting the presentations to improve their perceptions by buyers.Many organizations exploit the system to engage in "greenwashing", where one appears to be environmentally friendly to align their view with environmentally conscious customers. (Smith) This manipulation has significantly altered the dynamics of ESG based investments, inducing the reported numbers as less reliable.

The death of ESG may seem devastating for the future of ethical business practices. However, just because an ineffective measure has failed to be implemented on a global scale, doesn't signify its end. Approaches to conscious capitalism, and separating the E, S, and G to report separately and achieve a regulated healthy market should be anticipated.