“G” in ESG is Good Enough

ESG hasn’t always been a loaded word. Advocates for sustainability point to the corporate trailblazers seemingly capable of marrying profits, people and the planet. The fact that companies no longer focus solely on profits but rather assessing the risks associated with their business practices and operations is a win for everyone. While it might sound like a good idea to publicly tout ESG credentials, it may do more harm than good.

After the Adani Group was slammed by a whistleblower last month for greenwashing its ESG ratings, companies who focus too heavily on ESG messaging risk neglecting their fiduciary responsibility to maximize returns for their shareholders. Adani lost roughly half of its market cap, and since there has been little else but talk of due diligence or, lack thereof.

Tangible ESG-related items remain important even for critics. Assessing the material impacts of a company’s activities allows for better management of risk and opportunity including environmental and social issues. Adopting performance metrics, on the other hand, is risky especially for small caps struggling with what to measure, how to measure it and what to report. With limited budgets for ESG and investor relations spend, small caps would be better served by being a good corporate citizen: run your business responsibly with strong internal controls and good disclosure practices. Some companies by virtue of their industry aspire to reach certain ESG rankings however, a better goal is to build real operational change that leads to ongoing improvements.

Good governance (the “G” in ESG) is fundamental to a well-run organization, regardless of how one feels about the E and the S. Highlighting the “G” in your messaging is akin to social responsibility. Furthermore, eliminating ESG altogether as an investment case and pointing to the “G” throughout your messaging will make a far larger impact on investors, especially during due diligence.