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What you'll learn
The End of ESG — Saif Hameed
Transcript:
SAIF: Welcome back to another episode of the State of Sustainability. This is another content bite, and in this one I'm going to talk about why it's the end of ESG as we know it. And I feel fine.
So in this episode, we're going to talk about one of my favourite bugbears: ESG. I really hate ESG. I hate the term, and I always kind of have. I'm going to give a little context for why I dislike it, go into the history of it, and then talk about what I think the future holds.
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Why I Hate ESG
The reason I dislike ESG is that it clubs together things that are completely unrelated and incomparable. As a recovering analyst, I always try to find comparability and trade-offs between different sets of metrics — especially if you're trying to optimise for them as a group, which most businesses are when they think about ESG reporting and disclosure. There is usually no single source of truth on what you should be reporting on within ESG. I've seen all flavours, all stripes, all standards. The maximum I've ever seen is about 218 different KPIs under an ESG umbrella for a single business. The minimum is probably 20 or 30. And those metrics might be as different as the presence of slavery within the value chain, instances of lawsuits against the business, and the water intensity of operations. There is literally nothing that unites those three things. Businesses that do really well against one might do really badly against another. There's no ability to compare and contrast them.
There is no other business function where this is the case. If you take the IT function, the finance function, procurement, sales, or marketing — there is always a point of synergy between pretty much all the KPIs that matter to that function. Within sales and marketing, for example, you're thinking about how many opportunities you have, their size, the lead time, the conversion rate. Different teams might optimise for different things, but they all meet at some point. In ESG, they don't. Which begs the question: why do we even talk about ESG? Where did it come from? Who dreamed this up?
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A Brief History of ESG
The funny thing is that it's not very easy to find out. I had to do a little research. If you look at the Wikipedia article, the first mention appears in a 2004 UN report — but that report references it as though it's already a known thing, so it would already have been in general use before that. Going a little deeper, what I found is that ESG was first contrived as a way to get a small set of financial institutions to think about the other stuff beyond the financial stuff. The logic was: there's all the stuff that you, as a financial institution, do for your main business — and then there is this other stuff you should also be looking at when you're investing in or lending to a business. These qualitative aspects around risk, corporate citizenship, brand — this should also be a thing.
When you look at it through that lens — ESG was originally contrived as a lens through which institutions outside of a business's operations could look in — it starts to make more sense. I see you as a basket of risks and opportunities. Do you have a bunch of lawsuits to your name? Have you polluted anyone's water? What's your emissions footprint? You could see all of these becoming part of a checklist for institutions looking at whether to invest or lend. And the expectation would probably not have been that this checklist would materially sway the decision — but it should at least inform how the asset is viewed, and maybe how the opportunity is marketed.
A few things stand out in what I'm describing. First, this first mention of ESG didn't really relate to operating companies at all — it was for investors and lenders. Second, the framing was inherently outside-in. Third, it was inherently an "other" category. And finally, it was really a checklist — not the comprehensive data sets, strategies, roadmaps, transition plans, teams, and functions we expect today. And every now and then, businesses — individually or in groups — do funny things that make no real sense. ESG is one of those things. It came up in one place, grew, and then took on a life of its own in a completely different context. Scope 3 is actually very similar — it originated as a way to think about national emissions budgets and industry emissions allowances, and then somehow became a reporting standard for individual businesses. When you look at it that way, it's no surprise that Scope 3 seems completely illogical in a business operating sense.
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The Future of ESG
ESG now has a really bad reputation. In the US, it has become almost a starting gun for a political debate wherever it comes up. I think that's because ESG has been so heavily politicised and has started to represent the concern that decision-makers have for things beyond the average person — abstraction, smaller minorities, other agendas — rather than what matters to many people: can I bring food home, do I have a job, do my kids go to school, is there basic healthcare for me? I'm not saying ESG merits all of this, but I think it's come to represent a lot of stuff that people feel isn't actually about them.
The most politicised elements are very likely in the social column. I very rarely find anyone super critical about the governance column — most people agree organisations should have an ombudsman, a complaints process, a whistleblower policy. Governance is almost uncontroversially accepted. The environment tends to be more politicised, and even within that there's a spectrum. Water, despite being treated as not super important from a corporate ESG perspective, is actually one of the least controversial environmental metrics from an average person's perspective. The history of caring about water goes back decades and is literally universal. I studied the impact Shell had on the Niger Delta at college — and it was about water pollution and water rights, not oil in general. In China, the hot environmental topics are around water. In Pakistan, where I'm from, it's water and flooding. Climate change, obviously, has been heavily politicised over two decades.
But here's the point: each of these metrics has a different personality. Each little bucket and sub-bucket is very different. And I don't think it's possible to save brand ESG. It had a brief life, it probably should never have existed if we're honest, and it is now being forcefully put to bed. And I think that's a good thing.
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What Comes Next
Putting ESG to bed allows us to stop treating it as a checklist — as something other people use to look at you from the outside — and instead take each individual topic, mission, objective, or KPI and figure out how to make it work inside the business. For each one, the first question should be: why does this matter to us? Is it purely a compliance requirement — in which case, fine, do the bare minimum, comply, and move on? Or is this genuinely table stakes for our business, a core priority?
When you pull metrics out of that random basket and look at them individually, many of them turn out to be critically important to specific businesses. If you're a beer company and you don't have access to water, good luck making your beer. If you're a mining business not prioritising the welfare of communities around your mine, you'll struggle to hire people, operate smoothly, and you may lose your licence to operate. There is no one-size-fits-all.
When you start splitting the basket apart, a few things become possible. First, you can optimise for fewer things — not 50 things, but five, with a clear prioritisation. Every CEO I speak with is already telling their sustainability team: you get three things to focus on, and really that means you get one thing and two sides. Second, you can operationally set up to actually deliver. Instead of asking the ESG team to somehow optimise 218 things with no money and no authority, you can say: we want to build a diverse workforce because we think that gives us the best access to talent — so we're giving this mandate to our talent team. They own it at every stage, from recruitment marketing to progression. Or: water is a core operating resource for us — so we're giving it to our manufacturing or ops team. When you start disambiguating these metrics, you can say what you care about, which team owns it, and what the value of doing it well looks like for the business.
I can't wait for ESG to be put to bed. But that doesn't mean I'm excited about losing sight of the underlying pieces. 218 metrics is way too much. It's much better if sustainability teams do fewer things — but with depth, consistency, longevity, and ultimately with impact.
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