I sat down with an experienced Environmental, Social, and Governance (ESG) fixture in the North Dakota business world this week, Jason Spiess of The Crude Life and ESG University. He provided me with a breadth of knowledge about how ESG came to be and its impact on the American marketplace.
A couple of things he clarified for me. 1) ESG in certain sectors is a regulated benchmark, however it has not taken root comprehensively. Also, the SEC has launched a task force focused on fighting climate change using ESG as their auditing tool. 2) Financial institutions will use this even at the small business level to determine who they finance and at what level. In some cases financing businesses that work with oil & gas companies are at a disadvantage due to ESG non-reporting, or low ESG scores. In his words, “If you’re talking about ESG in the boardroom now, you’re about three years behind.”
I was shocked to learn that the matriculation of these metrics has been so thorough and so rapid. As I challenged last week, the major problems inherent to the model are the ever-changing and confusing guidelines. The Financial Times in an article entitled “Navigating the thicket of ESG metrics” reported that Wells Fargo was evaluated by competing ESG firms resulting in extremely different scores. This does not build confidence in the system. Spiess had this to say, “Right now the ESG Economy is on the 1 yard line with 99 yards to go... in the first quarter and the refs have yet to announce the rules or bring the ball out to the field, but, the game has already started because companies, countries and economies are already being impacted” (For a list of top ESG rating groups and methodologies from the Harvard Law School Forum on Governance click here).
ESG has two areas of focus that impact us in the business world. 1) Marketing and 2) Measurable Action. I tend to lean toward the latter because I don’t believe in doing something just because it looks good or you’re expected to. I asked Spiess what companies can do to begin their journey into the ESG metaverse. His firm provides a half-day audit that provides a score and an ESG report within a week’s time. He also recommended using free online tools and questionnaires to assess your company’s ESG score.
To be fair, currently ESG is (mostly) only impacting publicly traded firms, large private firms, and companies seeking venture capital. But it’s coming for all of us. Wall Street is already using this metric to rate companies and provide a score that in certain cases is presented before their earnings record (see below). ESG is scored much like golf, the lower the better. The metric uses words like “severe,”, in worst cases and “low” for top performers on a scale of 100. I asked Spiess to give it to me straight. What are the best and worst aspects of ESG for our future. He pulled no punches. According to him, the upside is verifying that investments are going to companies whose leadership and investment benefit the world in some tangible way (rather than exploiting it with forced labor and fraud - although a fraudulent company can easily self report a great ESG score). The downside? If companies don’t create a metric for themselves based on their realities, innovations, and advantages, one will be created for them. Essentially, wall street, investors, and regulators will chokehold our companies into compliance by metrics they create for us.
As you can see from the helpful ESG pillars diagram below, many of the metrics they use are common-sense in building a successful business. Lower water consumption = lower cost. Bribery = scandal and loss of confidence in your brand or service. A huge part of this rating is decarbonization, and Spiess makes a great observation, “Our species has been limiting carbon output for years, by default. [Referencing heating] we went from wood and wax to whale oil, to coal, to electric and natural gas - because they were better.” A large part of the ESG push is to force rapid change by hitting corporations where it counts, their wallets. If this change is poorly managed, it will be used as a tool for larger established organizations to gut the marketplace of competition, regardless of the value we actually create.
Why should small business owners care? Again, if we don’t create our own standard of excellence, one will be created for us based on little knowledge of what we do, how we do it, or the value we create in our industries and communities. If there ever was a curve to get ahead of, it’s this one. Candidly, due to the ever-moving target of ESG metrics, you should keep it simple. Don’t spend a lot of money or time overdoing it. Use free tools or low cost options with firms like Spiess to simplify the process and customize it to your field.
So why is this relative to ‘safety’? I believe that our value as safety professionals is in supporting our companies’ operational goals to guarantee they are as competitive in the marketplace as possible. Yes, this encompasses workers sustaining their health, quality of life, and right to a safe workplace, but that is just the (very low) baseline. As a part of our efforts, we are encouraged and free to look up the pipeline, see what’s coming, and develop a strategy to leverage these changes to benefit our organizations. ESG is the next speed bump, and depending on our ability to absorb the impact, it will hardly be noticed or it will tear us apart.