By Paul Mueller
ESG advocates use a variety of jargon to describe their activities and goals. Some are pretty straightforward to define, others are rather ambiguous and slippery. Today’s column will help you cut through the clutter and ask the right questions of ESG advocates.
Here are a few general terms worth explaining:
Not all ESG-related behavior is really legitimate ESG behavior. Sometimes firms simply engage in “greenwashing.” This label is used pejoratively against those who are not doing ESG “right.” While the term greenwashing was coined in the late 1980s, it really only took off after the United Nations created the ESG label in the early 2000s.
Greenwashing means using environmental language to deceptively label companies, products, or activities as more environmentally friendly than they actually are. Perhaps a company pretends to have environmentally friendly policies while continuing to pollute, or does something showy (like planting a few trees) but of limited significance.
“Greenwashing” may seem like it would only be used against those who are undermining or avoiding ESG goals, but it has also been leveled by the SEC at ESG-labeled investment funds who purport to advance ESG goals but whose activities are deemed to be cosmetic or insufficiently radical.
Another ESG term is the “license to operate.” While that sounds like a legal term, ESG advocates use it to mean some kind of social approval or popular mandate. Unpopular companies, therefore, have a low or non-existent “license to operate.” Companies are charged with a duty to develop buy-in and approval of various stakeholders, many with limited knowledge of how the company, or business in general, actually function. Put another way, companies are expected to “give back” to their communities. Or else.
Or else what? That part is usually left unsaid.
Though this “license to operate” may sound like a fictional bogeyman, I mentioned the term to a friend who works for a major mining company and he said management there spends a significant amount of time and energy worrying about their (social) license to operate. This term has roots in the idea of corporate social responsibility, which suggests that businesses can be illegitimate even if they have not violated any laws.
Tobacco and alcohol companies, firearm producers and distributors, gas and oil producers, and firms developing natural resources all start with a questionable license to operate. They must “give back” to various community organizations to justify their existence.
Diversity, Equity, and Inclusion (DEI) is another acronym full of landmines and obfuscation. What these terms actually mean depends on whom you ask. Sometimes, advocates say, it simply means good business practices like not discriminating based upon race or sex, taking sexual assault claims seriously, and promoting based on performance rather than nepotism. None of those things, however, requires DEI offices or consultants. They certainly don’t require Chief Diversity Officers.
More often, DEI advocates pressure companies to have employee, manager, or board member quotas based on ideas of intersectionality — layers of identity ranked on how “oppressed” or “privileged” individuals and groups might be. Equity in this sense means equal outcomes, not equal treatment or equal opportunity. And Inclusion means accepting gender and race-based ideology – being an “ally” and making the right public statements, or at least donating to the right causes. This UPS report is a perfect example.
Corporate Social Responsibility (CSR) arose in the 1990s and early 2000s to expand the scope of what businesses ought to do. CSR helped birth the idea of the “environmentally conscious consumer.” It also suggests that businesses should consider the environmental and social impacts of their activities, beyond what is necessary to generate shareholder returns or comply with existing laws and regulations.
Companies are criticized for paying wages deemed too low by outsiders, or for not “giving back” to the communities in which they operate. Eventually, concerns spread to how companies sourced materials and subcontracted in other countries, whom they were also supposed to hold to widely varied definitions of ethics, safety, health, and pay equity.
The ideas of Corporate Social Responsibility strongly infuse Environmental, Social, and Governance criteria today.
Finance has become the main target of ESG advocacy. Here are a few related financial terms that preceded the rise of ESG and are still important:
Sustainable Finance
Various bonds and instruments are created to fund activity that advances social or environmental goals. These range from Green Bonds and Blue Bonds focused on environmental impact to Gender Bonds and Racial Equity Bonds focused on DEI-related objectives.
Compliance (regulated) Markets
Voluntary Markets
Climate-related SEC disclosures (450 pages)
While this overview of terms may feel overwhelming, it illustrates the breadth and extent of Environmental, Social, and Governance criteria now used in financial and business decisions. While the spread of ESG is alarming, its individual goals, terms, and ideas are not overly complicated.
While I have attempted to clarify the ESG advocates’ terms, the devil is in the details. One of the weakest parts of ESG is the ambiguity and disagreement, even among its advocates, as to how to define and measure many of their objectives. Without objective measurements or standards, regulators, lawmakers, and investors will not be able to judge the ESG merits of individual companies.
Source: AIER
Paul Mueller is a Senior Research Fellow at the American Institute for Economic Research. He received his PhD in economics from George Mason University. Previously, Dr. Mueller taught at The King’s College in New York City.
His academic work has appeared in many journals including The Adam Smith Review, The Review of Austrian Economics, and The Journal of Economic Behavior and Organization, The Journal of Private Enterprise, and The Quarterly Journal of Austrian Economics. He is also the author of Ten Years Later: Why the Conventional Wisdom about the 2008 Financial Crisis is Still Wrong with Cambridge Scholars Publishing.
Dr. Mueller’s popular writing has appeared in USA Today and Fox News, as well as the Intercollegiate Review, Christian History, Adam Smith Works, and Religion and Liberty, among others.
Dr. Mueller has given talks and led colloquia for a variety of organizations including Liberty Fund, the Institute for Humane Studies, the Intercollegiate Studies Institute, and the Russell Kirk Center for Cultural Renewal.
Dr. Mueller is also a Research Fellow and Associate Director of the Religious Liberty in the States project at the Center for Culture, Religion, and Democracy. He owns and operates a bed and breakfast (The Abbey) in Leadville, Colorado where he lives with his wife and five children.
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