Business Has Bigger Worries Than ESG

Written by:
30 May 2024
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Originally Appeared In

This article was originally published in Australian Financial Review on or about 30 May 2024 and was written by the author in their capacity as a contributor for that publication. 

It has been republished on the IPA website with permission. The views expressed are those of the author alone.


One explanation for the seeming decline in discussion about ESG is that it’s something that goes in and out of fashion according to economic conditions.


Management consultants and corporate affairs advisers like talking about ESG because it gives them something to do. It’s a big business advising big business on their environmental, social and governance standards, and reporting.

According to PwC, “ESG is one of the most important problems facing Australian companies across all industries today”. Which is exactly what you’d expect PwC to say. If you’re the owner of a hairdressing salon or a cafe struggling to keep it afloat, you’d have a different view from PwC on your business problems.

Small business insolvencies are at the highest level since 1999 when the Australian Securities and Investments Commission started collecting such statistics.

As Christopher Joye wrote on these pages last month, “Intensifying labour and input costs are a killer for companies with little pricing power”. Now, even big businesses are discovering other things to worry about than environmental, social and governance goals.

A Bloomberg study of the financial presentations of the 100 biggest European and American-traded companies found that while chief executives haven’t yet completely stopped espousing the ESG mantra, they’re finding other things to talk about.

Climate change and related terms generated 269 mentions in the US so far this quarter, more than 60 per cent fewer than a year ago.

Profit produces diversity, not the other way around.. Likewise, it might be that profit produces ESG, and CEOs who give lectures about ESG.

In one specific example, a year ago at JPMorgan Chase’s annual meeting, CEO Jamie Dimon cited “climate complexity” as an issue, speaking of “the inextricable links between economic growth, energy security and climate change”.

In this year’s address, Dimon focused on wars, geopolitics, technology and artificial intelligence, with climate change only mentioned during the question and answer session.

Similarly, diversity and related terms generated 121 mentions about America’s biggest listed groups during the current quarter, down from 244 a year ago.

Bloomberg’s report came after the publication in March of an academic paper, McKinsey’s Diversity Matters/Delivers/Wins Results Revisited, by two professors of accounting, Jeremiah Green at Texas A&M University and John Hand at the University of North Carolina.

Their conclusions, put simply, debunk years of “research” from management firm McKinsey & Co purporting to show “companies that have more diverse leadership teams are more successful”.

McKinsey’s claims that hiring and promotion should not be based purely on merit have been quoted around the world, including in Australia, for example, by the Australian Public Service Commission.

Diversity initiatives

Because McKinsey refused to release the original data, the professors reverse-engineered the evidence of companies from the S&P 500. They wrote: “We do not find a statistically significant positive correlation between McKinsey’s measures of racial-ethnic diversity of the executive teams of firms” and the likelihood of financial outperformance of those firms.

Green and Hand concluded that “the direction of causality” was probably the opposite of that claimed by McKinsey. In other words, the more profitable a firm was, the more likely it was to engage in diversity initiatives.

Profit produces diversity, not the other way around. Likewise, it might be that profit produces ESG, and CEOs who give lectures about ESG.

One explanation for the seeming decline in discussion about ESG is that American CEOs are afraid to talk about it because they’re “worried about getting sued and heckled by Republican shareholders and state-level officials”.

If that’s true, it reveals the reluctance of CEOs to fight for a cause they claim to believe in.

Another explanation for Bloomberg’s findings is that ESG has become mainstream and is now taken for granted – which is possible.

And there’s a third explanation. ESG is one of those things that’s nice to have, but you don’t actually need. You can survive perfectly well without it – it’s something that goes in and out of fashion according to economic conditions.

Like a family deciding whether to cook dinner at home or go out. In good times, they might eat at a restaurant a few times a month while, in more straitened circumstances, that might become a few times a year – if they go out at all.

ESG could eventually go the way of “stakeholder capitalism”, “triple bottom line” reporting, and the “social licence to operate”.

Maybe ESG was a fad for a time when executives didn’t worry about a war in Europe, a war in the Middle East, a potential war in Asia, and another Trump presidency.

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This article was original published in The Australian Financial Review and was written by the author in their capacity as a contributor for that publication. It has been republished on the IPA website with permission. The views expressed are those of the author alone.

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