On Nov. 22, the US Labor Department released a ruling to allow—and even encourage—retirement plans to consider ESG factors in investment decisions, stating that prudent investment on behalf of future retirees “may often require” plan fiduciaries to consider the human and planetary costs, or risks, of doing business.
Secretary of Labor Marty Walsh said the rule “clarifies that retirement plan fiduciaries can take into account the potential financial benefits of investing in companies committed to positive environmental, social, and governance actions as they help plan participants make the most of their retirement benefits.”
The decision reverses constraints placed on ESG investment by the Trump administration.
On top of the SEC’s proposed rules on climate disclosure, and considering the growing interest, especially by younger investors, in understanding both the risks and costs of the stocks they hold—well, we can safely assume ESG investment is here to stay.
“ESG” builds on ideas initially dubbed socially responsible investment, or SRI, which first took hold in the 1960s and 70s. Attempts to integrate “non-financial” performance of companies into money management have captured more and more market share ever since.
Investor demand and government rule-making will not, however, quell the debate over how and when to stand up to ESG critics or charges of executive overreach. ESG is now a political football and shorthand for everything the right sees as wrong with corporate America. Environmentalists have concerns about “greenwashing” and confusions of ends—is ESG investment about selling funds or is it about real impact?
Boards, executives, and those who advise them are bracing for headwinds that may only strengthen as we lean into the next US presidential election. How should companies respond? And what does this moment mean for corporations committed to taking the long view—to making investments to address firm-specific and systemic risks in an uncertain business environment, investments that will only prove out in time?
The most obvious response is to return to business principles and priorities. Executives are on firm ground when ESG concerns connect to the long-term health of the enterprise. Today, that may mean stepping into domains that are outside the control of an individual business, like a textile firm that joins with other manufacturers to ameliorate working conditions in the supply chain, or a food retailer that collaborates with producers to reverse overfishing. In that context, ESG is not about politics; it is about recognizing long-term risks, building up resilience, and addressing practical realities.
None of this is easy, but regardless of the noise over ESG, these kinds of considerations are on the critical path to long-term value creation. The work begins with greater clarity about the aims of the corporation, aka corporate purpose.
Here are four things for boards to think about as executives come off the sidelines and play offense when it comes to their company’s intentions, execution, and voice.
The first step for boards is to ask themselves three crucial questions:
- What is the company’s real purpose—the one revealed by our business model and incentive systems?
- Is it fully aligned with our stated intentions and commitments?
- And what is critically important to achieving those ends, i.e. ensuring our long-term success?
In today’s media landscape, it’s not realistic for a company to stay completely silent on social issues. There is no such thing as a neutral stance. It is about building or retaining the trust of customers and employees. Authenticity is key.
Stop talking about non-specific stakeholders (investors-employees-customers-communities-environment) and speak directly to the health of the inputs and systems on which your company is truly dependent. Some call this “materiality”; it’s also common sense.
Employees are not just “stakeholders”—they play an increasingly effective role in holding business to account for the social and environmental costs and impacts of their employers.
Edelman Trust data on the workplace reminds us that trust runs both ways—the executive that trusts the workers, earns their trust. When managed well, and fairly compensated, employees are real allies in the long game. What kinds of innovations will enable employees to deploy their unique knowledge of the supply chain or the customer experience, and therefore connect the business with communities of interest that influence the license to operate?
The need for access to critical inputs (minerals or other natural resources, dependable workers, societal trust) takes us down the road to systems change. The work ahead requires boards to get comfortable with new domains where the smartest person in the room may be from an NGO—or a competitor locked into the same system.
We will not address the big problems that threaten to undermine the future of the business one company at a time. Collaboration and partnership are required. So are regulations and protocols that preserve our natural resources and return a fair share of profits to employees.
Accomplishing any of this starts with companies having absolute clarity on what matters most—and the willingness to speak powerfully about the conditions and essential inputs for long-term value creation.
Judy Samuelson is executive director of the Aspen Institute’s Business and Society Program and author of “The Six New Rules of Business: Creating Real Value in a Changing World.”