By Paul Hogendoorn
“ESG” – what it means and why it matters.
“ESG” is a term that we are hearing more often these days, and one we will certainly hear more of in the coming years. In essence, it’s just a rebranding of the “Sustainability” message we started hearing a lot about 10 or 15 years ago. It’s a 3 letter acronym for “environmental”, “social” and “governance” – the idea being if we focus on doing better in all three of these areas, we will be doing better for the planet, our society, and ourselves. But, whatever the new branding, it still comes down to sustainability.
Ten years ago, I wrote a column on this topic that is as relevant today as it was then. Sustainability was often only thought of as an environmental issue, or even more specifically, as a green energy issue. But it’s far more than that and best thought of as a three-legged stool.
Many years ago, when I was a kid spending a summer at my uncle’s farm, my uncle pointed out the engineering brilliance of the three-legged stool he used in the barn. One less leg and the stool would always fall over. One more leg and the stool would always wobble if the floor was even slightly uneven. Three legs made it perfect for the job.
And so it is with “sustainability.” The first leg is “environmental,” the second “economic,” and the third “ethical.” Each one is as important as the other two. None should be longer or shorter than the others, and none should be considered more or less important.
We all know the importance of being “planet friendly” today. There’s not a decision or discussion that happens today, around the boardroom table or family dinner table, that doesn’t involve the environment – i.e. going greener.
In the new ESG branding, I’d argue that the “G” for “governance” pertains to all 3 legs, but in earlier decades “G” placed its primary focus on profit, or economics. Economics is still important and can’t be buried as a part of good governance because good governance is supposed to cover environmental and social responsibilities as well. Economics should not be forgotten in the new “ESG” messaging.
For industrial, organizational and even societal sustainability, economics must be considered when choosing a course of action, because as companies, countries, or even as individuals, we do not accomplish much when we are bankrupt. For us to harness the collective contribution of our human minds, efforts and toils, we need to do so in a way that sustains us economically.
The S in ESG is social, but the compatible word I used 10 years ago was Ethics. Ethics is a word that is linked closely to social responsibility and also to corporate and organizational behaviour. When a factory is moved from one country to another to escape tough environmental laws for instance, it’s a step backwards for the whole planet environmentally.
I once saw an illustration of the relationship of these three factors, and a series of equations quickly formed in my engineering mind:
- Environmental + Economical = Viable
- Economical + Ethical = Equitable
- Ethical + Environmental = Bearable
- Environmental + Economical + Ethical = Sustainable
Every major question we are facing requires addressing the same three issues. If a company and a union are only considering economics and ethics, they are only looking for an equitable deal. If a government and a strong lobby organization are only considering environmental and ethical issues, they are only looking for a bearable solution. If a company is considering a plant relocation for purely economic reasons, and perhaps to escape some burdensome local environmental regulation, it is only looking for a viable solution.
Whatever term we use, whether it is “sustainability” or the new three letter acronym “ESG”, it comes down to the same thing. Our companies have to consider the planet and the people more intentionally as part of their plans than they may have in the past, but they can’t lose sight of the fact they also have to make a profit.
It is indeed like a three-legged stool; without one of the three legs in place, the company, like the stool, cannot stand.