Should not ESG apply another marketing strategy?
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About two weeks ago (I wrote this up at the end of September 2021), Aswath Damodaran, an eminent finance professor at NYU, published in his blog post a very skeptical view of ESG with the title of “The ESG Movement: The “Goodness” Gravy Train Rolls On!”
That post was concluded as follows:
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“The ESG movement’s biggest disservice is the message that it has given those who are torn between morality and money, that they can have it all. Telling companies that being good will always make them more valuable, investors that they can add morality constraints to their investments and earn higher returns at the same time, and young job seekers that they can be paid like bankers, while doing peace corps work, is delusional. In the long term, as the truth emerges, it will breed cynicism in everyone involved, and if you care about the social good, it will do more damage than good. The truth is that, most of the time, being good will cost you and/or inconvenience you (as businesses, investors or employees), and that you choose to be good, in spite of that concern.”
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According to the conclusion of his post, the fundamental reason for his keeping cynical view toward EGS seems to be that ESG does not ensure companies earn more and does not guarantee ESG investors make more as well. In other words, in his view, current enthusiasm toward ESG is nothing more than an 'overestimation.' In his perspective, ESG is abnormally adopted by many companies even though it does not positively affect their value creation.
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Seeing someone skeptical of ESG is not a rare experience. Fortunately, Professor Damodaran, as a world-class scholar, presented the above opinion based on his long-term research utilizing numerous resources available to him. Therefore, I believe his argument on ESG is valid, appropriately strengthened by supporting evidence.
However, not all ESG cynics are like Professor Damodaran, who maintained his integrity as a scholar even towards the movement he is opposed to. Among various companies and academics, I met as an ESG consultant, many had opposed ESG based on their gut feelings, without evidence.
In other words, from the standpoint of those skeptic companies or investors, whether because of reasonable grounds or their bold instincts, ESG has not been agreeable. Then, as an ESG professional, shouldn't it be necessary to think about why companies can't shake off their resistance to ESG?
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Why does not everyone accept ESG?
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I tried to remember the discussions I had with my anti-ESG fellows, and I would like to point out the following three reasons for the biggest holdback for such people to accept ESG:
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ESG measures must be taken immediately, but effects are expected to occur much later.
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How the status of ‘problem resolved’ would look is ambiguous.
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Even if a company do not take immediate action, no immediate damage is expected to occur.
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Combining the above three reasons, I can conclude that ESG can be an irrational option for companies. The earlier a company invests in ESG, the more likely it is to worsen its profitability. Also, it is unclear what the upper limit of the investment in ESG would be. Finally, ESG requires many assumptions about when and how much the return on investment will occur. Considering this conclusion, I can understand the skepticism of ESG Management. However, what I want to ask my anti-ESG fellows is not whether their cynicism is justified, but rather, "Can ESG be subjected to skepticism?".
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Can ESG be subjected to skepticism?
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People who are skeptical about ESG commonly believe that, for companies, ESG means 'doing good things.' In other words, they consider ESG as 'doing peace corps work' as it appears in the analogy used by Professor Damodaran above. Regardless of how it is branded; as Corporates' Social Responsibility, Sustainability, ESG, or some other name, this concept has been relentlessly linked to philanthropic activities.
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However, I think the premise is wrong - ESG is much closer to 'doing right things,' rather than 'doing good things.' In other words, contrary to what skeptics think, for companies, ESG is not an 'option to take based on reasonable grounds' but 'compulsory to do despite any difficulties.' The reason for this is as follows:
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How to promote ESG, to companies and Investors?
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Combining all the conclusions above, the very hopeless interpretation that ESG is a 'must do,' even though it is 'the earlier you do it, the more likely you are to lose,' is possible. As such, what ESG consultants and other experts should offer to skeptics may not be a description of the rosy future expected of investing in ESG management. Instead, for skeptics, a more effective marketing strategy may be to inform them "Why is ESG unavoidable, and how can companies and investors minimize the expected losses from it?" For example, as follows:
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Respond to the essential issue that cannot be delayed any longer.
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Continuously track the importance of the issue and adjust the level of response.
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Give a hint for investors about why materiality matters to them.
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I believe that ESG management is an essential key to increasing sustainability in businesses and our society. However, I am also aware that there are people who disagree with that view.
In this situation, I might consider skepticism toward ESG as simple ignorance and be consistent with inaction. However, rather than that, I thought it would be a more desirable approach to explore the reasons for forming skeptical views on ESG and use this to create the general public's correct expectation for ESG.
I am calling this an end of this write-up, hoping that the Materiality presented earlier can provide a clue of how ESG professionals could do so.
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