The French Revolution began 13 years after the American War of Independence and lasted six years. The democratic ideals behind the revolution seemed to fail afterward, as conservative forces took back power. Yet, ultimately, democracy proved too powerful a force and spread around much of the world. Democracy, today, it is the norm.
Likewise, World War I started in 1914. The four years that followed were so horrible that they inspired a movement toward internationalism. That movement seemed to have utterly collapsed by the time World War II began in 1939. And yet, after World War II, a new era of international cooperation and communication began with the launch of the United Nations and many global agencies and trade agreements. Peace and collaboration today are the norms.
My point is that societal change movements do not happen instantly, nor do they follow a linear path. But once they’ve been introduced into the general consciousness, they begin to take root, and their power and momentum only grow.
That’s what I tell corporate leaders, friends, and colleagues who look at ESG (Environmental, Societal, and Governance) investing skeptically. Even today, as the movement is starting to impact businesses and sectors’ success, some still think it’s a fad. And there are reasons for caution. Performance measures can be vague, arbitrary, or wrong. Companies that look strong on ESG from one perspective look weak from another. For example, according to two different agencies Tesla, has ranked as one of the most environmentally responsible companies and one of the worst in the same year. It all depends on the measures being used.
ESG started back in the 1960s, even before the term was coined, as some investors refrained from putting money into companies they deemed harmful. For the next 40 years, it was an ethical question more than a financial strategy.
Should we profit from companies that make their money in dubious or harmful ways? Movements to de-invest in companies that did business in Apartheid-era South Africa or fossil fuel businesses like Exxon grew out of this idea.
ESG gained momentum in the early 2000s when UN Secretary-General Kofi Annan launched the Global Compact, which called for better corporate citizenship in human rights, safe labor practices, anti-corruption, and environmentalism. The 2005 UN report, “Who Cares Wins” and the 2006 Principles for Responsible Investment movement laid out clear guidelines for corporations to sign on to and follow.
In the year 2015 UN launched the “Envision 2030”, an agenda clearly defining the 17 Sustainable Development Goals (SDGs), a holistic approach covering from poverty to climate and from inequality to clean water.
By 2018, the head of Blackrock, the world’s largest fund, called for companies to heed such guidelines, decrease their harmful impact, and be societal leaders. Today, there are hundreds of funds and billions of dollars devoted to ESG investing.
Still, it’s easier to run a company “ethically” when times are good than when they are tumultuous. It remains to be seen how COVID encourages companies to act following ESG principles when their survival is at stake. Other companies will undoubtedly seize opportunities or shortcuts that ESG companies know they should avoid and will be rewarded in the short-term accordingly.
I believe ESG is here to stay, however, for three reasons:
1) Customers are now activists
Even customer segments that seem conservative or passive by nature can be quickly activated when they perceive that a company or industry is doing something wrong.
2) Transparency is Unavoidable
It’s no longer as easy to hide the way you do business. Someone somewhere will find out the truth. Just ask Volkswagen.
3) Purpose Leads to Breakthrough Innovation and 10X Growth
In mature markets, few companies distinguish themselves through process improvements. Instead, the big prize goes to companies that distinguish themselves by connecting a sense of higher purpose to a market need. They can grow by multiples as a result.
For companies that want to get on board with the ESG movement, it’s time to re-examine their purpose, align business processes accordingly, and seek innovations that leverage that power.
Those companies still biding their time are likely to face a rude awakening. Because the ESG movement has taken so long to arrive, they may believe they have time to catch up. They should heed Ernest Hemingway’s description of how bankruptcy occurs: “Gradually, then suddenly.”
Social movements have always happened that way — “gradually, then suddenly” — even now, when change and disruption seem constant and non-stop. Then they become a norm.