As climate change continues to grow as a problem, companies are seemingly more focused on prioritizing planet over profit than they used to be. Reports of companies committing to net-zero emissions and adopting other sustainable practices have become increasingly common.
This trend for companies to become more sustainable in their practices can be considered a subset of the adoption of ESGs — or Environmental, Social, and Governance standards. The intuition? That by doing business responsibly, companies can do good while also reaping positive financial externalities.
The adoption of ESGs is growing quickly. For instance, we saw an almost 30% increase in the number of companies in the S&P 500 that adopted ESGs from Q2 to Q3 2019 alone.
But that begs the question: what motives do companies have, if any, that compel them to adopt environmental best practices beyond just doing good?
Avoiding Damaging Crises
On the investing side, even if it’s not immediately obvious why sustainability-minded organizations are in a position to produce greater returns, the financial ramifications for neglecting the environment are abundantly clear.
For instance, BP’s 2010 Deepwater Horizon oil spill was unfortunate not only because it caused 4.9 million barrels of oil to be dumped into the Gulf of Mexico, which impacted marine life and caused 13 deaths; from a financial standpoint, the crisis also cost the company billions of dollars.
Or more recently, recall Volkswagen’s infamous emission scandal (often dubbed ‘Dieselgate’) that started to become exposed in 2015. What we can take away from Dieselgate as a case study is that when you try to cheat emissions regulations, what you get in return is damage to consumer trust, fines, and lawsuits.
So the argument for adopting ESGs in the context of sustainability could be as simple as it’s not only good for the environment but also pivotal to avoiding PR crises and hefty fines.
Consumer Trends Suggest Adopting Sustainable Practices is a Good Move
But even beyond the penalties that seem to arise when companies ignore the environmental factors inherent in adopting ESGs, we can motivate a positive business case for these values by taking a look at consumer trends.
For instance, we notice that consumers are indeed willing to pay premiums on sustainability. Specifically, a whopping 73% of Millennials are willing to spend more on items they deem to be more sustainable. Applied to the general population, that number is as high as 66%.
To businesses, this means that by involving themselves in activities that are environmentally conscious, they can not only be socially responsible but also make more money doing it.
A Darker Motive: ‘Borrowing Money at Negative Rates’
Chamath Palihapitiya, the Founder and CEO of Social Capital, is an outspoken critic of ESG investing. And in a recent interview with CNBC, he described ESG investing as “a complete fraud” and “a joke.”
Though Social Capital appears to have financial interests in tackling climate change, Palihapitiya doesn’t see ESG adoption as necessarily a good way to move the needle on climate.
“If you paint yourself as ESG in Europe, you can essentially borrow money from the ECB at negative rates,” he told reporters on-air. As a corollary, Palihapitiya suggests that companies these days can make a variety of sustainability claims and reap financial benefits from them, yet none of these claims actually need to pan out.
In Palihapitiya’s words, companies “don’t need to do anything.”
The Big Challenges on the Consumer Side
Though adopting sustainable practices sounds like a win-win scenario for companies, the key limiting factor, as always, is the specificity required of companies to make the claims they do.
The argument for sustainability is generally an easy one to make. But when sustainability claims are vague, unverifiable, or reach far into the future, it becomes natural for consumers to question a company’s intent.
One recent example of this phenomenon is H&M’s Conscious collection, which features a line of “organic and sustainable clothing” for women. It was met by a slew of harsh criticism in late 2019 and serves as somewhat of a cautionary tale.
People may very well continue to be skeptical in some way or another about why companies adopt environmental values. And the only way to change that perception is with specificity and transparency, even in scenarios where companies have the best of intentions.