“What is a cynic? A man who knows the price of everything, and the value of nothing.”
Oscar Wilde
Recently, the notion that investment funds do good in the world by using their considerable influence to steer the for-profit firms that they invest in towards helping combat societal ills came under new and severe criticism.
The attorney general of Arizona, along with attorneys-general from 18 other states, wrote an open letter to BlackRock, the world’s largest asset manager, suggesting that its reliance on environmental, social and governance (ESG) criteria in its investment decisions puts the funds that they manage for their clients (including many state employee retirement funds) at unnecessary risk. The “Wall Street Journal” editorial board co-signed to this position in an I-told-you-so-style editorial titled, “The ESG investing backlash has arrived.” Florida governor, and potential Republican presidential candidate, Ron DeSantis even publicly presented new legislation that would prohibit Florida’s state fund managers from considering ESG information when investing state money.
For three years now, the MIT Center for Transportation & Logistics and the Council for Supply Chain Management Professionals have conducted an annual survey of global supply chain managers regarding their firms’ sustainability efforts. From what we see in the research, what critics of ESG investing get right is that (1) investors are a leading driver of pressure on firms to improve their sustainability, and (2) that ‘sustainability’ means very different things to different people.
From 2020 to 2021, we observed that investors were by far the fastest-growing driver of sustainability pressure on firms. At the same, the understanding of what exactly ESG and supply chain sustainability entails changes depending on the geography, industry and year that we ask. For instance, is corporate sustainability just climate change mitigation, or does it also include human rights protection and diversity, equity and inclusion? Put simply, executives and investors around the world are not in agreement on what business sustainability entails and how best to practice it. In that sense then, it’s reasonable to assume that some firms might feel investor pressure steering them towards an ESG vision that seems to them foreign or unclear.
But thinking more deeply, this criticism misses two important points. First, that these critics themselves disagree with BlackRock’s or others’ prioritization of ESG measures — or can imagine constituents, or readers of theirs who might disagree — does not on its own merit total rejection from investors. Nor does it merit, as some ESG critics suggest, a single-minded return to solely prioritizing bottom-line profit.
Individual attitudes about ESG and sustainability aside, inattention to supply chain sustainability leaves for-profit firms vulnerable to precisely the kinds of public relations disasters and supply chain disruptions that ESG and sustainability efforts endeavor to eliminate. These are the human rights scandals and environmental transgressions that make headlines, diminish brand value and negatively affect both stock price and continuity of supply. Critics who only see how ESG efforts cost the firm are in this sense, too myopic for modern practice. They fail to see that an equally strong case can be made that supply chain sustainability efforts actually protect a firm and its brand, and therefore, its investors. ESG investing is, in this sense, practical insurance, not some high-minded dalliance as the growing chorus of ESG critics suggest.
Second, while the cynics are correct to point out that sustainability prioritizations change with time — our survey clearly confirms their observation here — it is not necessarily correct to imply, as the cynics have, that this transience reveals that ESG and sustainability goals are themselves some kind of unserious scam. Eager critics like the attorney general of Arizona cite the example of European governments now forgoing their environmentally motivated closures of coal — and nuclear-fired power plants in order to prepare for the threat of Russia withholding its natural gas for heating this winter. This unfortunate geopolitical after-effect of Russia’s invasion of Ukraine is presented by the cynics as some kind of proof that the ESG stuff is all fluff and no substance when push comes to shove. But this is an incomplete picture of how sustainability efforts appear to be affected by crisis.
For the last two years, our study has directly asked supply chain management professionals worldwide how the COVID-19 pandemic has impacted their commitment to supply chain sustainability. For two years in a row now, approximately 80 percent of respondents have answered that their firm’s commitment to supply chain sustainability stayed the same or even increased during the global pandemic. In interviews with executives, we heard repeatedly that the COVID-19 crisis brought with it important new opportunities to rethink old systems. In times of crisis, prudent managers adapt, and they innovate with sustainability and resilience in mind. Sure, European governments are currently stalling their plans to shelve coal. But they are also taking unprecedented action to rationalize their overall energy demand too by identifying and eliminating wasteful consumption where they can. The ESG critics are misreading signals here, mistakenly interpreting helpful adaptation and innovation as weakness and capriciousness.
In any disagreement, it is important to grant that your interlocutor comes to his or her point of view in good faith. Or, as 2nd century Roman Emperor Marcus Aurelius put in his Meditations, “to take into consideration … that no one does the wrong thing deliberately.” I certainly intend the same grace here and I freely admit that the critics have a point regarding the vexing ambiguity of ‘ESG’ and sustainability. But in the end, all of us share the same plight: stuck on this imperiled planet, hoping that both our ecosystems and our retirement plans suffice for the rest of our mortal lives.
I’m sure that even those I disagree with on this point share my hope that what we have now will survive for future generations of all our loved ones too. Based on the extensive data that I’ve personally collected and analyzed, it is clear that ESG investing is an important — albeit perhaps imperfect — tool, to help us achieve that kind of long-term sustainability.
David HC Correll, Ph.D. is a research scientist at the MIT Center for Transportation and Logistics (MIT CTL) and lead investigator for the State of Supply Chain Sustainability, an annual report co-presented with the Council of Supply Chain Management professionals (CSCMP). These opinions do not necessarily reflect the opinions of MIT CTL, CSCMP, or the report’s sponsoring companies or project staff.