ESG Calls For A Pro Ecosystem Approach

ESG goals, about achieving pro-social environmental, social, and governance objectives in business have gained a lot of popularity with the public. Every other corporation today speaks of ESG, and so do consultants and the media. Is ESG a fad, or an authentic shift towards a more responsible form of capitalism that can align a business’ responsibility towards its investors, with the business’ broader responsibilities towards the societies they are a part of?

Talk on ESG themes is not new. Businesses since antiquity have grappled with the question – profit or the social good. The first modern corporations – the early modern East India companies – aligned their profit objectives with the broader (albeit imperialist and mercantilist) objectives of their governments. There is rarely a large corporation that does not pursue activities that – at least, nominally – attempts to give back to society, sometimes in the form of Corporate Social Responsibility (CSR), and at other times in terms of innovations that claim to improve the lives of their customers. When there exists no trade-off between profit and the social good, pursuing ESG objectives is not a complicated strategic choice. However, when pursuing social good comes in the way of achieving profitability and satisfying shareholders and investors, will companies still pursue the social good over profits? The answer to this question is not simple. 
 
Firstly, who defines what is social good? There is no objective definition of what is an ESG objective. A profitable oil corporation may believe that by producing cheap oil they are doing social good and by bringing cheap energy to billions who still today do not have access to round the clock electricity. These corporations will advocate for “pragmatic” solutions and fewer regulatory burdens on them. 

In parts of the world, despite the grave challenges that climate change poses to the developing world, the public in these countries may still choose low-cost oil and coal-based fuel over renewable energy, which brings them cheap power at scale. The government may also cut some slack on corporations in pursuing green objectives if the broader public opinion and profitability objectives of businesses favour less sustainable energy alternatives.

Secondly, even when ESG and profitability objectives of businesses are misaligned, for example in polluting industries, where the health and safety of local stakeholders are compromised, what nudges businesses to pursue ESG goals over profitability? The problem of regulatory capture is acute in the developed world – for example, the sway corporations have over individual Congressmen and Senators in the US through political donations – and even more acute in developing countries where institutions are weaker. So, environmental and safety laws may be diluted to accommodate corporate interests, even if it threatens the life and livelihood of vulnerable populations (for example, recently most explicitly in Brazil).

Due to the above fundamental challenges, discussions around ESG have all the qualities of being just a fad, unless there exists a broader ecosystem that supports it. As there exists no common or objective definition of ESG objective, the best bet we have is to create an ecosystem where the voices of all stakeholders can get heard.

Here, special emphasis needs to be given to the voices of the most vulnerable and underrepresented populations. “What is ESG?” cannot be a popularity contest, nor can it be left to academics, policymakers and other elite groups to define and theorise. There can be various and contradictory conceptualisations of what is ESG, and like in a democracy, all these conceptualisations need to get a platform. Hence, responsible businesses must incorporate such perspective-taking from all stakeholders as a standard and everyday aspect of their decision-making. Businesses need to get out of their boardrooms and make informed, participative, and empathetic decisions.

Media plays a vital role in creating a healthy ecosystem that supports the pursuit of ESG goals, as media is the institution that gives voice to diverse people. For example, if a large business project is underway, it is the responsibility of the media to thoroughly give a platform to the perspectives of all stakeholders, especially those who are usually not consulted. The media, by bringing forth diverse and often concealed information, plays a critical role in an economy. They make markets freer, and the public more informed, by removing information-related frictions, and bringing diverse perspectives.

Finally, there exists no substitute for a strong civil society that doggedly pursues the interests of various stakeholders, and nudges businesses to act more responsibly. In contemporary India, as long as there is strong media and active civil society, the possibility of a repeat of the Bhopal Gas tragedy or a Chornobyl disaster is rare. But if media becomes a chorus representing the interests of corporations themselves, and the power of civil society wanes, the broader ecosystem we need for achieving ESG objectives will be gravely threatened.

Most corporate-driven and top-down talk of ESG will remain a fad unless we create an ecosystem that gives voice to all stakeholders, especially the most vulnerable and underrepresented, and democratises the economy, with a more bottom-up and participative approach to decision-making.

(Prateek Raj is Assistant Professor of Strategy and IIMB Young Faculty Research Chair at the Indian Institute of Management Bangalore (IIMB). Raj is also an Affiliate Fellow of the Stigler Center at the University of Chicago Booth School of Business.)