Repelling the Attack on Environmental, Social, Corporate Governance (ESG) Management
It isn’t any surprise that a political movement led by a company “manager” who made “you’re fired” a central principle of his practice of management is attacking contemporary management that seeks to navigate the complex world that organizations confront in 2023. Long before he entered politics, Donald Trump gave me a vivid example I could use in management classes to exhibit the failure of what I call macho management. While the people he fired on his television show, The Apprentice, were not likely his employees, he made termination of staff look like a beneficial tool of management. Firing people might make for interesting TV, but it surely is just not good management practice. Effective and competent managers treat termination as a failure of human resource and operations management: Either you hired the improper person, otherwise you so mismanaged a talented individual that the wonderful worker stopped performing.
ESG management has been overblown by ideologues of the left and right. As with all management practice, there are few absolutes, and ESG principles have to be crafted to take care of specific situations. Scoring firms on ESG practices is a little bit ridiculous, but ignoring or opposing ESG management is even worse. The, practice of management has advanced dramatically over the past century. Accounting, financial control systems, management information systems, just-in-time inventory control, international commerce, operations management, team management, and a number of other innovations have enabled managers to boost productivity while coping with an increasingly complex business environment. ESG management is solely one other tool for managers in search of to take care of our rapidly changing world.
The fundamentals of ESG are straightforward. The primary principle is to focus management’s attention on the organization’s impact on the natural environment. Virtually all human activities have negative impacts on natural ecosystems, so the goal is just not to eliminate impacts but reduce them to a minimum. Pollution is a type of waste, and if one applies the principles of total quality management and industrial ecology to production processes, a central goal is to scale back waste as a way to reduce cost. Within the case of pollution—or waste that impacts a corporation’s neighbors—cost can even include liability incurred by damaging another person’s property. These liability costs can extend to a corporation’s supply chain as well.
Being careless about a corporation’s environmental impact is an indicator of inadequate management. Just as a construction project riddled with injuries and death is a sign of a poorly run operation, any operation that creates unnecessary risk from pollution indicates poor management. Under macho management, pollution-belching smokestacks are an indication of commercial might. Under this approach, charging ahead without worrying about impact is an indication of strength: “With a view to make an omelet you’ve gotten to interrupt some eggs.” The concept of “breakage” is baked into financial control systems and is assumed to be a routine cost of business. Under environmental sustainability management, precision, control, and care replace the sloppy habits of the early industrial era. An agricultural giant like Land O’ Lakes uses drones, satellite technology, artificial intelligence, and robotics to exactly apply water, fertilizer, pesticide, and herbicide to the plants in its fields. This reduces costs but in addition reduces pollution of nearby groundwater and streams. The E in ESG is about environmental care and concern.
The second principle in ESG is that organizations must be mindful of their impact on the area people. This is just not a latest concept; we see it after we compare the 2 banks within the classic Christmas movie “It’s a Wonderful Life.” The Bailey Brothers Constructing and Loan is of and for the community, while Mr. Potter’s bank was only in it for the cash. Here in Recent York, a tone-deaf Amazon.com was unable to site its HQ2 in Long Island City when community leaders rebelled against a multi-billion-dollar subsidy for one among the world’s richest firms.
The third principle in ESG is about corporate diversity in operations and governance. Writing on this issue this past March, I observed that:
“A corporation that privileges one race, gender, religion, sexual orientation, or national origin over one other reduces the pool of talent it may well draw on to staff and manage the operation. We’re in a brain-based economy. The high value-added parts of the economy and the best profits are within the organizations or parts of organizations which might be creative, analytic, and progressive. There’s extra money in software than hardware. As products turn out to be commodities, they’re subject to competitive forces that are inclined to limit profits. That’s the reason IBM stopped making personal computers. A various board and diverse employees will provide the good thing about more brainpower and different life experiences to handle organizational challenges. A less diverse organization tends to stimulate insularity and group think. Being awake and aware of the worth of diversity is an indicator of management excellence. In a world competition for innovation, customers, and profits, a various team that’s built on the most effective talent is more likely to beat the team that’s more homogeneous but less talented.”
The argument against ESG management is that these aspects don’t have anything to do with generating revenues or reducing expenditures. That they distract firms from increasing profits and are due to this fact breaking the contract between shareholders and management. To some conservative politicos, they’re extraneous and left-wing ideological principles. I don’t deny the ideological element of ESG advocacy. It annoys me, but it surely’s definitely real. After all, the ideological opposition to ESG by conservatives is greater than annoying. It’s destructive. My argument is that whatever the politics, ESG management is about effective management within the 21st century brain-based economy on a planet with over eight billion people. As Paul Simon once wrote: “One man’s ceiling is one other man’s floor.” Recent Yorkers like Paul and me live in apartments and understand crowding. And this planet has gotten crowded. The necessity for precision and care in management is growing since the impact of mistakes is growing. There was a time when you may dump garbage within the ocean knowing it could decompose and biodegrade. After the invention of plastics and chemicals that were durable and long-lasting for industrial use, waste now not degraded within the environment and its disposal and treatment became more complex and dear. We profit enormously from latest chemical technologies, but their use often creates environmental issues that have to be addressed. If we’re going to proceed to advance our economy through the event of recent technologies, we must learn easy methods to manage those technologies, so that they don’t cause harm to people and the planet.
In lots of cases, the argument appears to be less against ESG management than about using ESG aspects to guide investment. I believe that investors that require ESG management before they are going to invest are taking a shortcut that’s sure to disappoint them. You may have excellent management, including factoring in ESG concerns, but for those who’re facing bad market conditions or pushing a terrible line of products, all of the ESG practices on this planet won’t prevent. Investments should never depend on single indicators, and ESG itself is barely one element of management. I think it’s vital, but removed from sufficient. The measurement of organizational use of environment, social impact, and company governance practices continues to be in its infancy. We’re at in regards to the same place that financial accounting was within the mid-Thirties. On the environmental side of the equation, we’ve not yet developed generally accepted environmental sustainability metrics. The identical is true of measures capturing using corporate governance, diversity, and community impact principles. Assigning firms ESG scores after which using those scores to guide investment decisions is not sensible.
But delegitimizing ESG aspects is no less than as bad as misusing and misunderstanding their measurement. We’d like to get well at understanding these issues and managing organizations in ways in which reduce environmental damage, enhance host community impact, and increase organizational brainpower. Most senior managers with business and law backgrounds don’t understand these issues. The graduate programs I direct at Columbia University in Sustainability Management (established in 2010) and Environmental Science and Policy (established in 2002) have now educated over three thousand sustainability professionals who do understand ESG issues. Programs at Arizona State, Yale, Bard, the Recent School, NYU, Harvard, American University, UC Santa Barbara’s Bren School of Management, Duke, LSE, and The University of Toronto (amongst others) have educated 1000’s more. These latest sustainability professionals have the training needed to show ESG from aspirational goals to organizational deeds. We’re on the start of a latest era of management. But we’ve rather a lot to learn. Progressives place an excessive amount of faith in our ability to administer sustainability, and conservatives fail to understand the importance of those issues to the company bottom line. It is gloomy or perhaps comical when state legislators who know little about management and even less about science attempt to legislate against what they’ve decided is “woke” management or “woke” investment. But it’s also dangerous to overestimate our ability to administer based on sustainability principles. We’re learning, and we’re recuperating. But we’ve an extended solution to go, and a little bit humility is unquestionably called for. I’m optimistic about our progress but caution against overconfidence. The attack on ESG have to be repelled, and the most effective defense is results and improved organizational performance.
