The public discourse on environmental, social, governance (ESG) issues in business operations is very rarely based on economic reasoning and analysis. Predominant are marketing and sales messages (such as “ESG is not a cost, it’s an investment”) that[1], instead of clarifying, often further increase the conceptual confusion about the issue – its scope, goals and actual effects on companies and the larger environment. This is a significant problem, especially since the term and idea of ESG, along with the related concept of stakeholder capitalism, have spread at lightning speed, despite the fact that they are not based on sound science[2]. Certainly, there is not such a strong advocacy among leading economists behind them as there is for a carbon tax as a tool for reducing CO2 emissions.[3]
As a result, ESG can mean anything, depending on who is talking about it, to whom and for what purpose. This elasticity and ambiguity of ESG is a great feature from a marketing perspective, as it makes it easier to conduct a “cherry picking” narrative – that is, to select the most favorable-sounding arguments possible, depending on the context and the recipient. This allows any company or the manager representing it to join this cheering orchestra, delivering their enthusiastic message at one of the many business conferences[4].
Thus, for example, investments that are normal, standard economic practices like replacing lighting to reduce energy costs (and, incidentally, greenhouse gas emissions) are presented as examples of ESG practices. Up until a decade ago, no one would have made a marketing “noise” around such projects and placarded them as ESG. Such “signaling” of certain decisions that would have been made anyway due to economic factors has become a encouraged behavior by ratings and ESG indicators.
At the other end of the understanding of ESG are various initiatives that have nothing to do with conducting business, but rather are a way to manifest political and ideological viewpoints in order to create influence externally and strengthen one’s position internally by company executives[5]. The nature of this phenomenon, which involves the ousting of market competition (for the best possible satisfaction of customers’ needs) by political and lobbying activities (in cooperation with influential stakeholders – state institutions, international organizations and NGOs, etc.) was brilliantly described by Vivek Ramaswamy in his book “Woke Inc.” – explicitly naming the so-called stakeholder capitalism along with ESG as “crony capitalism.”
The ESG agenda is sometimes presented as a necessary solution to environmental and social problems that state institutions are failing to address through traditional instruments – such as regulation or fiscal incentives. Certainly, problems such as climate change, soil or water pollution, or a range of social problems that contribute to lower satisfaction and quality of life should not be ignored. On the other hand, the prevailing catastrophic narrative in the mainstream media and social media, combined with constant criticism of the market economy, increases the risk of introducing ineffective solutions to existing problems. It is the job of economists to evaluate the costs and benefits of the various solutions available.
ESG cannot be ignored in the same manner as CSR has been in the past, as it is backed by costly and highly business-impacting regulations emerging at the EU level. There is also some evidence of changes in social preferences, also in Poland[6]. This conclusion that the ESG agenda cannot be ignored is unaffected by the serious doubts indicated above, which refer to the very essence of ESG – the scientific basis, definitions, goals, consequences. It is also not altered by such facts like the outbreak of war in Ukraine, high inflation and energy market disturbances, which have become a major challenge to the ESG agenda in developed countries, with the US at the forefront. Finally, the fact that the ESG concept has become vulnerable to political attacks, from both sides of the political spectrum (either as being insufficiently or too radical) does not seem to change this either.
In particular, the CSRD, which introduces a universal ESG reporting obligation,[7] is an important issue that requires robust analysis and economic debate – something that is lacking in Poland, while opinions of individuals or entities that profit or want to profit from these regulatory burdens dominate. For this reason – along with the dominant media narrative – the discussion is extremely one-sided. Moreover, legal acts like the CSRD represent a specific, objective fact to which analytical reasoning can be applied – as opposed to the vague, broad concept of ESG. Therefore, the survey was focused on ESG reporting under the aforementioned CSRD.
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Footnotes:
[1]Example of a debate with the above-mentioned slogan: https://www.portalspozywczy.pl/technologie/wiadomosci/quot-esg-to-nie-koszt-tylko-inwestycja-quot-pelna-relacja-z-debaty-eec-2023-foto-wideo,223102.html
[2]The analysis of this issue is included in the WEI report: https://wei.org.pl/wp-content/uploads/2022/03/Kapitalizm-interesariuszy.pdf
[3]https://www.econstatement.org/
[4]M. Friedman, in his famous essay on corporate social responsibility, was highly critical of company representatives who declare support for the idea of corporate social responsibility (CSR): “Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.” See https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html
[5]FOB’s report on corporate activism
[6]See https://wei.org.pl/2023/aktualnosci/admin/raport-czy-polacy-sa-woke/
[7]The CSRD and the related European Sustainability Reporting Standards (ESRS). On 31st July 2023 the European Commission has passed the final text of a delegated act establishing European Sustainability Reporting Standards. See https://ec.europa.eu/commission/presscorner/detail/en/mex_23_4044
