Sustainable business and business ethics were discussed on the 14th floor this past Tuesday by a panel of analysts who work to improve disclosure and integrity practices of corporations worldwide.
Sponsored by The Robert Zicklin Center for Corporate Integrity (ZCCI) and the Sustainable Practice Network (SPN), “Sustainability Evolved: Embedding ESG Performance in Corporate Valuation” addressed how consulting firms are using Environmental, Social and Governance reports (ESG) to promote a much discussed but seldom employed aspect of business: long term sustainability.
ESG, or Environmental, Social and Governance, is a performance model used by firms and investors to determine a company’s sustainable business practices. ESG metrics that investors demand are broken down into three aspects: environmental, social, and governance.
Under environmental, things like how much a company’s practices influence climate change, greenhouse gas (GHG) emissions, their waste and waste recycling ratio, and their renewable energy use are quantified.
Panelists included Robert Salomon, NYU Stern Associate Professor, Olga Emelianova, Senior Associate of ESG Research at MSCI, Karoline Barwinski of ClearBridge Advisors, and Flory Wilson, Director of International Standards at B Lab.
Salomon, of NYU, was the first panelist to speak. He voiced his appreciation of the huge turnout, stating that had this event been held 25 years ago, only two people would have attended. He discussed how demand for sustainable business practices have increased and described the pros and cons of ESG integration by using the Friedman-Freeman argument. The basis of this argument is ESG good or bad, became a reoccurring theme throughout the presentation.
As the argument goes, economist Milton Friedman claimed that ESG practices are fraud, hypocritical window-dressing practices, and that enforcing ESG practices will cost businesses unnecessary spending when their social responsibility is to make money. Edward Freeman countered that argument by stating ESG might increase short-terms costs but in the long run, they will generate consumer goodwill, encourage companies to adopt environmentally friendly practices, and significantly cut legal costs.
After Salomon, ClearBridge Advisors’ Assistant Vice President of Environmental, Social and Governance Investment Karoline Barwinski approached the podium and gave a soft-spoken recap on the import of ESG on business portfolios and how ClearBridge provides investors with traditional investment service and ESG portfolios.
“ESG is about integrating environmental, social, and governance factors into our portfolios and making sure the performance of the portfolio is comparable to traditional investing. I hope we can come across an idea that ESG can perform and is another investment strategy and if done right, it can really work.”
The next speaker, Emelianova of MMCI, gave examples of what ESG provides, such as risk management analysis.
The last to present their firm was Flory Wilson of the nonprofit B Lab, which on its website is describes a “B Corp” as a “new type of corporation which uses the power of business to solve social and environmental problems.”
Wilson says that B Lab was founded on the basis that consumers were becoming more conscious of their consumption. 60 million consumers, she said, stated that they have a preference for purchases from companies that are responsible in the products and services they provide.
The panel then opened up to hand-written questions from the audience.
“So Jeff, from Cincinattii wants to know what my favorite donut flavor is,” Salomon said, receiving mild chuckles from the audience. The real question was, “is there any statistical evidence or studies that ESG score enhances the performance of companies stock.”
Salomon himself answered, “It depends on who you are and what ESG type activities you engage in.” This answer rectified the fact that ESG determination requires much research, data collection and cooperation from big companies willing to create sustainable products.
A question that struck Salomon as interesting came towards the end of the discussion, and seemingly changed the flow of conversation from analytics to ethics.
“The question reads, Paul McCartney said ‘If every slaughterhouse had glass walls, everyone would be a vegetarian.’ So the question is, is having too much disclosure a bad thing? Are some aspects of business better left in the dark?”
Across the board, each analyst said no, that full disclosure is the best method to ensure sustainability and consumer goodwill. Investors and companies should have the best tools to measure the performance and longevity of their product and the company that is making the product. “Profits over people” is going out of season.