You might be familiar with my perspective on ESG by now—an acronym I’ve called empty, born of sanctimony, nurtured by hypocrisy, and marketed with sophistry. My journey with ESG began with curiosity in my exploration of its purported measurements back in 2019. This curiosity morphed into cynicism as the beneficiaries of ESG became increasingly apparent, and eventually curdled into outright contempt as ESG proponents retroactively rewrote history and altered their metrics in recent years. Just last year, I examined impact investing, a subset of ESG investing, and documented the trillions poured into combating climate change, with little to no tangible impact to show for it. Prior to these evaluations, I also delved into the concept of stakeholder wealth maximization, concluding it was an idea beloved only by corporate lawyers and strategists, and arguing for the continued focus on shareholders in conventional businesses. For each of these topics—ESG, impact investing, stakeholder wealth maximization—a common defense from staunch advocates was that “sustainability” represents the ultimate goal, and that failures in execution (within ESG and impact investing) shouldn’t discredit the core idea.
This notion of sustainability piqued my interest, but also my skepticism, especially given that the same individuals and entities promoting sustainability seemed to echo those who championed ESG and impact investing. Critiquing sustainability might seem like swimming against the current, but perhaps less so than it was five years ago when I first addressed these issues. In fact, in my initial post on ESG, I admitted the risk of being labeled a “moral troglodyte” for my views, a label subsequent posts have likely solidified. However, I possess a thick skin. This post on sustainability, if read, will undoubtedly draw sharp criticism from the self-righteous and remove me from their social calendars, but frankly, I’m not much of a party-goer anyway.
Sustainability: The Alluring Promise
Having spent over four decades in the realms of business and markets, I’ve witnessed the concept of sustainability evolve. While planetary sustainability has been a long-standing concern, it’s only in the last two decades that corporate sustainability has emerged as a prominent term in academic and business discussions, albeit with varied interpretations. Before examining these evolving definitions, it’s crucial to differentiate between three distinct forms of sustainability:
- Planetary sustainability: This measures the impact of our actions, both as consumers and businesses, on the planet and our collective well-being. It encompasses a broad spectrum from climate change to healthcare and income inequality.
- Product sustainability: This gauges the effective lifespan of a product or service before it becomes obsolete or waste. In a culture of disposability, where planned obsolescence appears to be intentionally designed into products, both consumers and governments are increasingly concerned with product longevity, albeit for different reasons.
- Business or corporate sustainability: This focuses on the longevity of a business or company and the actions that either prolong or shorten its existence.
Corporate sustainability advocates often argue that their concept encompasses all three dimensions, suggesting that businesses pursuing greater sustainability must create more sustainable products, which in turn enhances planetary sustainability. While this may hold true in some instances, inherent conflicts often arise. For example, a razor manufacturer could produce blades that remain sharp indefinitely, eliminating the need for replacements. However, this increased product sustainability could severely undermine corporate sustainability. Similarly, some companies—and your own biases might guide your selection—pose an existential threat to the planet. If planetary sustainability is the ultimate objective, their cessation of operations might be the most beneficial outcome.
So, which of these sustainability measures truly lies at the heart of corporate sustainability as it’s practiced today? To find the answer, I examined various stakeholders in the sustainability movement, relying on their own words to avoid accusations of misrepresentation:
[Definitions of Corporate Sustainability from Key Players]
- “Meeting the needs of the present without compromising the ability of future generations to meet their own needs.” – Brundtland Commission
- “Creating long-term shareholder value by taking advantage of opportunities and managing risks related to economic, environmental and social developments.” – Dow Jones Sustainability Index
- “A business approach that creates long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental and social developments.” – World Business Council for Sustainable Development
I am open to persuasion, but all these definitions appear to center on planetary sustainability, with varying motivations for business engagement, ranging from ethical considerations (“it’s the right thing to do”) to pragmatic benefits (“it’s good for business,” leading to increased profitability and value).
While corporate sustainability has gained prominence in recent decades, discussions about the social responsibilities of businesses have persisted for centuries. From Adam Smith’s 18th-century description of economics as the “gospel of mammon” to Milton Friedman’s fervent defense of business in the 1970s, debates about business have consistently included considerations of their societal obligations beyond mere legal compliance. Nevertheless, corporate sustainability and its related concepts have undeniably assumed a more central role in business than ever before. This is evidenced by the rise of “Corporate Sustainability Officers” (CSOs) in numerous large corporations. A 2022 PwC survey encompassing 1640 companies across 62 countries revealed a tripling in the number of companies employing CSOs in 2021, with approximately 30% of all companies having such a position. A Conference Board survey of sustainability leaders (acknowledging potential sample bias) indicated expectations of continued growth in corporate sustainability teams. Furthermore, academic research reflects this trend. A 2022 survey paper highlighted the surge in corporate-sustainability related articles in recent years, also noting their focus:
Source: Burbano, Delma and Cobo (2022)
Alt Text: A line chart illustrating the significant increase in academic publications related to corporate sustainability from 2000 to 2020, with a notable surge after 2015, indicating growing scholarly interest in the field.
It’s worth noting that much of the increase in articles coincided with the rise of ESG, which, at least for a significant period, was closely intertwined with sustainability. Reflecting this connection, many papers on corporate sustainability, mirroring those on ESG, framed sustainability as not only beneficial for society but also advantageous for companies adopting it.
I must confess, I was unclear about the precise role and responsibilities of a CSO until I had the opportunity to address a group of CSOs from fifty major companies. I began the session with a straightforward question, driven purely by curiosity: “What do you actually do in your organizations?” After twenty minutes of discussion, it became evident that there was no consensus. In fact, some CSOs seemed as uncertain as I was about their role and responsibilities. Amidst the varied, sometimes convoluted, and often contradictory responses, I identified the following potential CSO roles:
- CSO as Yoda: Some CSOs described their role as providing vision and guidance to their companies on the societal implications of their actions, adopting a long-term perspective. Implicitly, they presented themselves as possessing unique insight into the future evolution of society and the company, advising on necessary actions to align with this evolution. I was tempted, though I refrained, from questioning their qualifications for such wisdom, as a sustainability degree or certification hardly seemed sufficient. I did, however, consider Star Wars lore, where Jedi training is estimated to take a decade or two of intense dedication, leaving open the possibility of an institution somewhere producing sustainability Jedis.
- CSO as Jiminy Cricket: As a Disney movie enthusiast, particularly of Pinocchio, Jiminy Cricket, Pinocchio’s conscience, came to mind. For some CSOs, this seemed to be the model—acting as the corporate conscience, reminding companies of the social consequences of their actions. However, like Jiminy Cricket in the movie, they often risk being perceived as nagging scolds, frequently ignored, and rarely celebrated, even when proven right.
- CSO as PR Genius: A few CSOs openly acknowledged their role as marketing fronts, tasked with presenting actions that were far from beneficial to the planet as environmentally responsible. Unilever’s push to assign a social or environmental purpose to each of its four hundred brands, whether or not the CSO was directly involved, exemplifies this approach.
- CSO as Embalmer: Finally, some CSOs viewed their role as ensuring the company’s perpetual survival, perhaps even immortality. Drawing from my work on corporate lifecycles, I believe prolonged survival as a “walking dead” entity offers little value. However, in a world that equates survival at any cost with success, this becomes a byproduct.
Here’s a table summarizing these roles and the ideal training for each:
[Table of CSO Roles and Training]
| CSO Role | Description | Ideal Training |
|---|---|---|
| Yoda | Visionary, provides long-term societal guidance | Philosophy, Futurology, Jedi Master Training (humorously) |
| Jiminy Cricket | Corporate conscience, reminds of social impacts | Ethics, Moral Philosophy, Nagging Skills |
| PR Genius | Marketing front, spins actions as socially responsible | Marketing, Public Relations, Spin Doctoring |
| Embalmer | Ensures corporate longevity, even as a “walking dead” entity | Accounting, Restructuring, Necromancy (humorously) |
While I may be missing some nuances of sustainability, it’s important to remember that nuance often gets lost in the business world, where a version of Gresham’s law prevails, with less noble motives overshadowing the better ones.
The Tangled Web of Sustainability and ESG
In recent years, corporate sustainability advocates have attempted to distance themselves from ESG, arguing that ESG’s shortcomings are self-inflicted and stem from neglecting sustainability principles. However, I remain unconvinced. If ESG didn’t exist, sustainability would likely have had to invent it, as much of sustainability’s growth as a lucrative industry is fueled by its ESG component. In my view, ESG took the abstract concepts of corporate sustainability and transformed them into a score. This scoring mechanism, despite its flaws, triggered widespread adoption in corporate boardrooms and the investment community. It’s crucial to recognize that both ESG and sustainability derive their rationale from stakeholder wealth maximization, the principle that businesses should operate for the benefit of all stakeholders, not “just” shareholders. This is why I’ve previously used the term “theocratic trifecta” to describe the interconnectedness and marketing of ESG, sustainability, and stakeholder wealth.
Alt Text: A Venn diagram visually representing the overlapping and interconnected nature of ESG, Sustainability, and Stakeholder Wealth Maximization, highlighting their shared principles and goals.
The term “theocratic” is deliberate. Like theocrats in any domain, some within the sustainability movement believe they possess a moral high ground, viewing dissent as almost sacrilegious.
While a scoring system can, in theory, serve a positive purpose—measuring progress towards sustainability goals and promoting accountability—it inevitably generates predictable consequences inherent to all scoring mechanisms:
- Measurers present themselves as objective arbiters, despite the inherent subjectivity in defining “goodness” and assessing its impact on business profitability and value.
- Businesses learn to understand and manipulate the scoring system, engaging in “greenwashing” to improve their scores. Greenwashing is not a flaw in these systems; it’s an inherent feature. Increased refinement of scoring only leads to more sophisticated gaming.
- Advocates express concern about this gaming, proposing more detailed definitions for inherently indefinable concepts, failing to recognize (or perhaps disregarding) that this only perpetuates the cycle and intensifies gaming.
ESG has vividly demonstrated this destructive cycle. Scoring services like Sustainalytics, S&P, and Refinitiv employ different criteria and even change them over time. Companies with ample resources game these systems to achieve better ESG scores. Accountants and regulators have further complicated the situation by increasing disclosure requirements across nearly every aspect of ESG, with minimal demonstrable positive change.
Stepping back, ESG and sustainability share several fundamental characteristics:
- Opacity: Both ESG and sustainability are remarkably opaque, perhaps intentionally so, as this ambiguity allows advocates to market them in various forms. Defenders argue that details are being refined and standards are emerging. However, this rings hollow as the ultimate goal seems to constantly shift. For example, ESG initially aimed to “make the world a better place,” then evolved to generating alpha (excess returns for investors), then to a risk measure, and finally to a disclosure requirement. Advocates predict convergence driven by stricter definitions from regulators, particularly the EU, which introduced the Corporate Sustainability Reporting Directive (CSRD) in 2022. However, expecting economic and sustainability wisdom from the Brussels bureaucracy is akin to asking a long-time vegan for the best steakhouse recommendation.
- Virtue Signaling: While some ESG and sustainability proponents now avoid explicitly framing their arguments in terms of “goodness,” nearly every debate on these topics ultimately devolves into advocates claiming moral superiority, relegating critics to the “dark side.”
- Disclosure over Action: Purpose-driven concepts like sustainability and ESG seem to follow a predictable trajectory. They begin with the lofty goal of improving the world, are marketed with the seductive promise of “purpose and profit” (the original sin), and when this falsehood is exposed, they are repackaged as being about disclosures that empower consumers and investors to make informed decisions. Both ESG and sustainability are progressing towards this “disclosure-centric” phase. While increased information transparency seems reasonable, this disclosure drive has two significant downsides. First, disclosure can become a substitute for meaningful action, even hindering genuine change. Second, as disclosures become more extensive, especially when critical information is mixed with trivial details, users reach a tipping point and begin to disregard them, negating their informational value.
- Ignoring Sacrifice: Perhaps the greatest deception in the marketing of ESG and sustainability was the assertion that “you can have your cake and eat it too.” Companies were told sustainability would boost profitability and value, investors were promised superior returns from “good” companies, and consumers were assured they could make sustainable choices with little to no added cost. The reality is that sustainability will impose costs on businesses, investors, and consumers. Why should this be surprising? Throughout history, doing good has always required sacrifice. It was always arrogant to assume ESG and sustainability could rewrite this fundamental truth.
Despite the vast sums of money, time, and resources invested in ESG and sustainability, tangible progress on societal or climate issues remains minimal. The Siren Song of effortless virtue has led us astray.
Rescuing Sustainability from the Sirens?
Despite my “moral troglodyte” reputation due to my skepticism towards ESG, sustainability, and related concepts, I share the common goal of improving the world. This leads to the question: can corporate sustainability, or at least its underlying mission, be salvaged from the alluring but ultimately deceptive “siren song” it has become? I believe a path forward exists, but it requires steps that many sustainability purists may find objectionable:
- Realistic Business Objectives: There’s wisdom in Milton Friedman’s assertion that “the business of business is business,” not fulfilling social needs or catering to non-business interests. While businesses can create societal costs, and should be encouraged to act responsibly even beyond legal requirements, they shouldn’t be expected to replace the roles of governments and regulators. For corporate sustainability to be effective, the boundaries between business and government action must be clarified and respected in practice.
- Transparency about Costs: Acknowledge the real sacrifices in profitability and value required for companies to pursue societal good. In publicly traded companies, where stakeholders (shareholders, bondholders, employees, or customers) ultimately bear these costs, their buy-in is essential for voluntary sustainability initiatives. For well-managed, successful companies, this sacrifice might be easier to justify. However, for poorly managed businesses, it will be—and should be—a greater challenge. Corporate executives and fund managers who impose costs on stakeholders (shareholders, investors) without their consent risk violating fiduciary duties and facing legal repercussions.
- Clear Cost Allocation: When considering initiatives aimed at societal good (like fighting climate change), it’s crucial to be transparent about who bears the costs. For example, restrictions on bank lending to fossil fuel companies or mandates to subsidize green energy projects at below-market rates ultimately burden bank shareholders, depositors, or taxpayers. Given that bank equity is a small fraction of overall capital, depositors are often disproportionately affected by such mandates, increasing the risk of bank instability and failures.
- Honest Cost Sharing: Recognizing that societal good comes at a cost allows for a necessary follow-up question: who bears these costs? For too long, academics, policymakers, and regulators have been too quick to prescribe solutions for the “greater good” without considering that the costs often fall disproportionately on those least able to afford them.
- Eliminate Self-Serving Interests: Both ESG and sustainability have been tainted by individuals and entities who have profited from their existence. Rescuing sustainability requires removing these self-serving actors, many disguised as academics and experts. To identify them, look towards events like COP29, where many “useful idiots and feckless knaves” will gather, lecturing others on carbon footprints while flying in from afar. Businesses genuinely concerned about the planet should dismiss sustainability consultants and disclosure-driven business model adjustments. Consider eliminating the CSO position (unless, humorously, you employ a Yoda). Escaping the siren song requires shedding those who profit from its allure.
A fundamental, and often unacknowledged, problem is that while we (as consumers, investors, and voters) profess concern for social good, we are often unwilling to bear even minor personal costs (higher prices, taxes) to achieve it. This may stem from callousness, but more likely reflects a loss of trust in experts, governments, and institutions—a loss that is understandable. Whether it’s a local sales tax increase or a national carbon tax, taxpayers are hesitant to trust governments given histories of inefficiency and broken promises.
One argument from ESG and sustainability advocates is that resistance is primarily US-based, while the rest of the world embraces these concepts. However, leaving ivory towers and echo chambers reveals a global loss of trust. The political struggles of incumbent governments in Canada and Germany, despite their climate change leadership, partly stem from a “we know best” arrogance embedded in their climate policies, coupled with the insulting claim that those most affected will feel no pain.
Restoring trust requires moving away from the siren song of easy solutions. It demands humility from agents of change (academics, governments, regulators), transparency about goals, costs, and uncertainties, and patience, prioritizing incremental progress over radical, disruptive change. Only then can we hope to move beyond the deceptive allure and towards genuine, sustainable progress.
YouTube Video
My posts on ESG, impact investing and stakeholder wealth
