In our previous posts on ESG, we have explored how the quality of ESG data can be very noisy and how it would benefit from regulatory changes. This week, a working paper from Harvard Business School explores how ESG has changed from being a useful process to a product.
When ESG is viewed as a process (in its original design), it aims to measure the relevant resources that a firm uses and what salient outcomes come from said inputs. The framework is designed to analyse the resource allocation process an organization engages in and aims to express those processes to stakeholders. Therefore, it can be used by management to optimise their purpose and strategy. However, the ‘productisation’ of ESG has produced a demand for a framework that 'by design' differs from its original goals. Funds and portfolios can be labelled as ESG compliant or not. This binary perspective, erodes the purpose of ESG as a concept, likely contributing to the mass critique it has faced recently.
A rethinking of ESG as a conceptual framework, which can be used to measure and analyse industrial and organisational processes, would greatly restore confidence amongst values-based investors in its credibility, particularly as ESG has become more politicised, as noted in a recent post by the Interfaith Center on Corporate Responsibility (ICCR). Meanwhile, Dave Zellner (CIO of Wespath) has previously described how, '[by] integrating ESG considerations through our Sustainable Economy Framework [we address] material systemic risks that threaten a robust and thriving global economy'.
Faith-consistent investors should look to view ESG as a useful tool to measure the externalities generated by organisations and not as a binary product label, let alone a political one.