0:04

Where, if anywhere, is ESG

0:06

heading? Since the 1960s,

0:09

the principle of investing our money

0:11

and doing business responsibly and sustainably

0:13

has been growing in popularity, morphing

0:16

from a regulatory operation to a

0:18

cool business activity. But

0:20

recently, ESG has experienced a backlash, notably

0:22

in the US, where it's become a

0:25

big political issue. While we

0:27

may be losing the acronym, have we lost

0:29

the principle? I'm

0:34

Georgie Frost and this is The So What

0:36

from BCG. There are a

0:38

number of things that we've always sort of

0:40

trotted out as the value statement and

0:43

those are getting more and more measurable and

0:45

bigger each and every year. So

0:48

nowadays, corporations across the

0:50

world see the responsibility

0:52

ethic as a must

0:54

do, Today,

0:56

I'm talking to Tim Mohen, partner and

0:59

director in climate and sustainability at

1:01

BCG. Back in the beginning, corporations

1:03

weren't to be trusted, they were to be

1:06

regulated. And as a

1:08

sort of lifelong environmentalist, I wanted to help

1:10

the environment. And so you had a choice

1:12

back then. You could be an NGO

1:14

that stood on the gates and sort of

1:17

raised their fists and yelled at companies or

1:19

you could be a regulator and actually try

1:21

to mitigate some

1:23

of the externalities that companies

1:26

still to this day have. So I

1:29

chose a regulator, I became an EPA

1:32

regulator and I worked on air quality

1:34

for many, many years and had the

1:36

fantastic opportunity to work on some of

1:38

the foundational issues of our

1:40

time, like the Clean Air Act, which is

1:42

still very much with us today. And

1:45

that's what kind of started me in this business. So

1:47

it started with regulation, then companies started

1:49

moving faster than governments and they started to

1:51

get into this sort of corporate

1:53

social responsibility, trying to prove

1:55

their green credentials to anybody

1:58

who will listen. And finally,

2:00

now, where we are, is as you

2:03

stated in the beginning, ESG or

2:07

sustainability has become part of

2:09

the mainstream of global

2:11

commerce, of corporate strategy. And that's why

2:13

I'm at BCG. That's what's

2:16

so interesting about where this is

2:18

going. I'll let you into a little secret and

2:20

the listeners into a little secret.

2:22

When we were discussing this podcast,

2:25

I initially wrote the question, is ESG

2:28

over? So that would seem

2:30

to be perhaps a little bit harsh. So

2:32

we changed it to where, if anywhere, is

2:34

ESG heading. Is it over?

2:37

Is it done as an

2:39

acronym? I mean, before we get into the

2:42

principle of it, because it does seem to

2:44

be, it's become almost a toxic phrase. We

2:47

may have come to that point with the

2:49

term, because the term environmental social governance,

2:51

what does it actually mean? It's so

2:54

many different things. What does it mean?

2:56

Well, it actually does have meaning, right?

2:59

As one of the OGs of this space, I

3:01

often get asked this question. And

3:04

there is meaning to all of these terms. But

3:07

in essence, for a broader

3:09

audience, it's about 30 to 35 different

3:11

topics that have all been

3:14

mashed together. And

3:16

they can be as disparate as where companies

3:18

pay their taxes and

3:21

what they do to protect the

3:23

environment from climate change. So

3:25

when you mash all of those things together and

3:28

then say, OK, this is one thing, it

3:30

actually doesn't make a lot of sense. And

3:32

so it's really easy to vilify. And that

3:35

is, in fact, what has happened. I

3:37

want to get a little bit more, without getting

3:39

too political, this is not a political podcast, but

3:42

how we reach that point when you

3:45

think about really what

3:47

the principles of ESG, the fundamentals

3:49

mean. And I suppose this is

3:51

where we get into the have we lost the principle of

3:53

it. That's

3:55

such a good question because the principles have

3:57

not been lost. I think we have a brand new idea.

4:00

problem because ESG became

4:02

sort of synonymous with this

4:05

is corporations trying to do good and

4:07

investors trying to invest in a way

4:09

to make our economy work with our

4:11

environment and social needs. Those

4:14

principles are still very much

4:16

with us today and still very very

4:18

important. The branding issue has has really

4:21

gotten us into this problem where

4:23

some people have decided

4:26

this is a very political issue and you're either for

4:28

it or against it or it's woke or it's not

4:30

woke whatever. I think

4:32

what we're seeing in practice at

4:34

BCG is that companies have not

4:36

changed at all. In fact we're

4:38

seeing an increase in

4:40

what companies are doing behind the scenes. So

4:43

what are companies doing behind the

4:45

scenes? Well a great example is

4:47

diversity equity and inclusion. We're seeing

4:49

increases in companies taking

4:51

on that set of issues

4:54

to make sure that we have a

4:56

diverse inclusive and safe workplace. Those kinds

4:58

of things are bedrock to how companies

5:00

operate. They're not going away. Are

5:03

you concerned though while it does seem to be

5:05

holding up, the principles seem to be holding up,

5:08

are you concerned though that the bad publicity

5:10

will mean that sustainability comes

5:13

off the agenda or

5:15

actually it's now proved that it can

5:17

bring value and you can't

5:19

do business without it? It's

5:21

a hundred percent about value and it's always been about

5:23

value. You know I made

5:26

the switch as I said in our

5:28

introduction from a regulator to working in

5:30

corporations many many years ago and

5:33

when I made that switch half of my

5:35

friends said oh Tim you've sold out you're

5:37

working on the wrong side. I'm like no

5:39

no no you don't understand companies really really

5:41

do care about this stuff and they do

5:43

and so what we're seeing is that

5:45

kind of caring is continuing to happen

5:48

but it has to have value. There

5:51

was a paper written, gosh it was

5:53

probably 15 years ago now, Harvard

5:56

professor Michael Porter and Mark Kramer

5:59

work on this paper called

6:01

Shared Value. And basically, it started with

6:03

the premise, companies and our charities, but

6:06

in order to benefit

6:08

the environment, they have to benefit themselves.

6:11

And looking at it through that

6:13

lens, it's like enlightened

6:16

self-interest. How do companies

6:18

then continue to make progress on

6:20

these environmental and social issues? And

6:23

I think it's a very important paradigm and it's still

6:25

with us today. For

6:27

example, we saw the company

6:29

that's kind of been at the

6:32

crosshairs of this political debate, BlackRock,

6:34

actually increased their business in so-called

6:37

ESG investing over the last

6:39

six months. It's actually been one of

6:41

their biggest growth areas. And BlackRock is

6:43

trying to rebrand. They're trying to call

6:45

it transition finance now. So maybe we

6:47

haven't quite landed on the brand yet

6:49

because I'm not sure that rolls off

6:51

the tongue, but it is a

6:53

branding issue. Does branding

6:56

matter? I mean, I suppose if you are

6:58

a company and you're setting out

7:01

your model and your objectives

7:03

and your agenda, you need something,

7:06

don't you? Some language to give

7:08

to shareholders, to give to stakeholders.

7:11

It's real easy to be against

7:13

a three-letter abbreviation like

7:16

ESG. It's harder to

7:18

be against something like sustainability or

7:20

corporate responsibility, which are all terms

7:22

that we've used to essentially define

7:24

the same things we're talking about

7:27

here. So how should leaders then

7:29

be approaching this? How can

7:31

they get value from ESG sustainability, whatever

7:33

we want to call it, how can

7:35

they get value? Well, there's value and

7:37

there's values and they're very, very

7:39

different. All the companies that I've

7:41

ever worked for and some of the biggest ones

7:43

in the world start with

7:46

values. And those values basically

7:48

instruct their culture and

7:50

how they do business. And I

7:52

think that's the core of it, right? If we're going

7:54

to be ethical, if we're going

7:56

to be good at business and good for

7:58

the people who work. in our business and

8:00

the people around our business and those are

8:02

kind of the essence of all the different

8:04

corporate value statements I've ever seen, then

8:07

we have to then put those values

8:09

into our business culture, into

8:12

our business processes. And

8:14

that's what we're seeing in companies all over.

8:16

That's why I said about the diversity, equity,

8:18

and inclusion. It's a fantastic example because

8:21

for years it wasn't an issue and

8:23

we just sort of went on and then we look

8:26

around and everybody looks like each other. And

8:28

all of a sudden we realize we're way away

8:30

from what our market needs or wants

8:32

and so we decided that we need

8:34

a diverse workplace. And there were

8:37

study after study showing that that actually added value

8:39

to not only the corporate

8:41

life but the corporate business. And

8:44

so those are the kind of things that

8:46

I think are going to continue but it

8:48

really starts from values. What is your company

8:50

about? What is your culture about? How

8:53

do you do business? And then how do you

8:55

embody that in all of your operations? How

8:59

do you measure values,

9:01

achievement? Because it's very

9:03

difficult to change what you can't measure and I

9:05

think this is some of the issue with why

9:07

people have turned away from ESG is because oftentimes

9:10

you can't measure it

9:13

in certain areas. Obviously there are some that

9:15

you absolutely can, certainly the diversity of your

9:17

workforce you can, but in

9:19

other areas not so much. Well

9:21

first of all you're good at what you do, you ask the

9:23

right question. I spent a

9:25

lot of my time working on this

9:28

exact issue. The old

9:30

moniker, you manage what you measure is very,

9:32

very true. It's not just in corporate life,

9:34

it's just about in any institution, any business.

9:37

What gets measured gets managed, we

9:39

know that. I was the

9:42

CEO of a company called

9:44

the Global Reporting Initiative, GRI.

9:46

GRI has been around a very,

9:49

very long time and its entire

9:51

purpose is to measure corporate responsibility.

9:54

And so at the beginning I kind of mentioned

9:56

that there were probably 30 to 35 different topics

9:59

under the law. of this broad header of ESG,

10:01

each one of them has measurement.

10:03

They're all a little bit different. They

10:06

all have an accounting procedure and a

10:08

reporting procedure and all the boring stuff,

10:12

but they're all measurable. And what's

10:14

happening now, and this is the part that I find so

10:16

interesting, as this whole movement

10:18

has gone into the mainstream and received

10:20

that backlash that comes with going into

10:23

the mainstream, what you're seeing

10:25

is some of those measures get entrained

10:27

into things like financial reports. This

10:31

week, as we're recording this, we

10:34

had a new final rule

10:36

from the U.S. Securities and Exchange

10:38

Commission that would require all

10:40

companies to report on their climate

10:42

emissions, all listed companies. And

10:44

the U.S. is not alone. Even if it's

10:47

the world's largest economy still, we're

10:49

seeing that kind of thing happen

10:51

across the world. So measurement is

10:54

critical. There's not one answer because

10:56

there are so many different topics. How you measure

10:58

climate is different than how you measure diversity, for

11:00

example. But each of them

11:02

does have defined measurement techniques. How

11:05

significant was that SEC

11:08

long-awaited climate-related disclosure rules

11:11

announcement? While it

11:14

was long-awaited, there was about a

11:16

two-year period from the time that the SEC said

11:18

they were going to do this and they issued

11:20

a proposal to when it actually came out. And

11:23

you say to yourself, okay, what's the

11:25

big deal? Because we know

11:27

with U.S. politics, it's already

11:30

been litigated. So the

11:32

ink wasn't even dry and we had

11:34

lawsuits. So this is just going to

11:36

get entrained into that political situation. I

11:39

think what's interesting is the signal that

11:41

it sends. The signal that it sends

11:43

is that sustainability, ESG, whatever moniker we

11:45

put on it, has become part of

11:47

global commerce. That investors

11:50

care about this information because in

11:52

this information is risk

11:55

and opportunity. And

11:57

that's what investors want to seize. And they don't want to see it

11:59

in some... sustainability report that

12:01

is 100 pages long and

12:03

full of pretty pictures of children planting

12:06

trees, they want it in the sort

12:08

of crisp, comparable,

12:10

reliable disclosures that they're

12:12

used to in financial statements. So that's

12:14

why I think it's so big. We

12:17

are seeing the exact same thing happening

12:20

in other capitals. The European Union

12:22

is far ahead of the US

12:24

in terms of requiring this kind

12:26

of information in financial reports. China

12:30

just came out with their own sustainability

12:32

reporting regulation. Then you could

12:35

go on, the UK, Japan,

12:37

Singapore, Hong Kong, Australia, all of these

12:40

capitals have basically said if you want

12:42

to list your company in our capital

12:44

market, you must disclose at least climate

12:47

and in some cases even more. I

12:50

don't want to say was that the missing piece,

12:53

but was that a significant piece

12:57

that was missing in making

13:00

this truly mainstream?

13:03

It is. There's no question in

13:05

my mind that once the worlds of

13:07

finance and sustainability

13:09

come together, be it on just

13:11

one or two metrics, climate change

13:14

is the top of mind for most people. Then

13:17

that's the camel's nose under the tent.

13:19

Then we've cracked it because all of

13:21

the sudden you've aligned the

13:24

power of capitalism, which that is the

13:26

institution we have, to the

13:28

needs of the world. When you

13:30

can align capital to sustainable business

13:33

practices, then we've cracked it. In

13:36

all your experience when you speak to companies

13:38

and what sort of

13:40

percentage are we talking about that are,

13:42

would you say truly on board with

13:44

this? Not just something nice in their

13:47

reporting statements. This is meaningful change.

13:50

Is business on board with that?

13:53

Your question, Beliza, an interesting

13:55

point, which is what

13:58

do people feel? I worked

14:00

much of my career in business.

14:02

I can say that people

14:04

are people regardless of whether they work

14:06

in big corporations, run big corporations, or

14:09

if they work on the NGO side or if

14:11

they work on the government side or whatever. They're

14:13

still people and they still have their values with

14:15

them. What I saw when

14:17

I worked for some of these big companies is

14:19

that there was a lot of morality.

14:22

There was a lot of moral outrage when

14:24

we found things that were wrong in our

14:26

supply chain and we wanted to go fix

14:28

them right away. And

14:30

that really matters. Companies are not just robots

14:32

for profit. They're run by human beings. Human

14:35

beings want to leave a legacy and

14:37

hopefully a legacy for good unless they're

14:39

just sociopaths. We

14:42

generally don't have those. We have good

14:44

people running good companies and they do

14:47

care. Now, do

14:49

they care beyond their

14:53

own aligned incentives?

14:56

Sometimes yes, sometimes no. You

14:58

see that with some companies like

15:00

7th Generation's, Tom Shoe's, the companies

15:03

that really are built on

15:05

a brand around doing good. But

15:08

most companies, they have this, as

15:10

I used the term before, enlightened

15:12

self-interest where in fact by

15:14

doing good, they're doing well and

15:16

they know that it attracts,

15:19

retains, engages employees. For example,

15:21

it builds the brand. It helps build

15:23

the customer base. There are a number

15:25

of things that we've always sort of

15:28

trotted out as the value statement and

15:31

those are getting more and more measurable and

15:33

bigger each and every year. So

15:35

nowadays, corporations across the world

15:38

see the responsibility ethic as

15:40

a must do, not a

15:42

nice to do. You

15:44

mentioned there about supply chains, which makes me

15:47

think, and I don't want to go into scope one, scope two, scope

15:49

three, etc. But it's hard enough

15:51

to measure and stay true

15:53

to your own values and Within

15:56

your company. But When you think about global companies now,

15:58

there's just so much to do. So many points

16:00

along the way that you. Don't have control

16:03

over, particularly if you're not

16:05

an enormous company with enormous

16:07

influence over other companies. If

16:09

you're a sort of small.

16:11

Medium companies, but that does tough

16:13

a supply chain than it's very

16:15

difficult. Is it not to? Really make

16:17

a big impact? Or is it. It's. Incredibly

16:19

difficult, and I can remember even working

16:22

for some of the big companies I

16:24

mentioned before. We. Thought it

16:26

was impossible. And yet we

16:28

found ways to do it. Probably. The

16:30

best example is some I work

16:32

in this a very large company

16:35

at the time and we were

16:37

sitting around a table in trying

16:39

to figure out how we would

16:41

get a handle on behaviors, social

16:43

behaviors, labor behaviors, environmental pollution In

16:45

that first line. Of suppliers

16:48

that very first hear that we're

16:50

making our products and then that

16:52

we had a session in the

16:54

meeting where we invited some and

16:56

yost come in they came in

16:58

and said you know it's about

17:00

these minerals that her mind and

17:02

conflict areas and you need to

17:04

be in charge of dealing with

17:06

see this conflict minerals because this

17:08

is truly agreed us and we

17:10

were like. Oh. My gosh, we

17:13

can even get a handle on

17:15

our first year. How are we

17:17

going to get all the way

17:19

back there to deal with these

17:21

issues that are truly egregious in

17:23

the war torn mining fields in

17:25

Africa? But. It was

17:27

a challenge and when we went back

17:29

to our sort of corporate leaders. All

17:32

of them said. This is so

17:34

agree to set of it's in any

17:36

part of our supply chain. We want

17:38

nothing to do with it and in

17:41

fact we need to solve it now.

17:43

So I use this example to give

17:45

you a sense of how collective action

17:47

through business can work. We actually created

17:49

an organization still very much with us

17:51

today. I was the chairman of the

17:53

board of it for a while called

17:55

Responsible Business Alliance that was able through

17:57

collective action of bringing a buyer supplier

17:59

together lot small didn't matter to trace

18:01

and track all the way back. So.

18:04

That we would have a idea of

18:06

where are materials were coming from and

18:08

then we could take action to not

18:10

only just avoid. Those materials.

18:12

But to actually help those places where

18:14

the materials came from be better and

18:16

so that? That's a good example. but

18:19

it's not the only example. Obviously companies

18:21

have been working on this for some

18:23

time. Sadly, many of the issues that

18:25

we have in terms of labor and

18:27

human rights are still very much with

18:29

us today there. So growing in some

18:31

cases to the work is not dining

18:33

facto. it's never done. So

18:36

this is. About to signings our

18:38

use. Collaboration.

18:40

Pardon long like that you mention of the

18:43

seat. the role of regulators, watson governments and

18:45

regulators do to ensure that was still on

18:47

targets. I assume you think we us away

18:49

from where we were at The Salt which

18:52

is companies aren't be trusted but regulated as

18:54

you would not quite still there. But we

18:56

do need regulation that we we do need

18:59

government action. We do and I think ted

19:01

term. Third, there has to be many tools

19:03

in the toolbox because the problems are so

19:05

big and so I'd I do think that

19:08

there is a strong role. For

19:10

government regulation I think the question is

19:12

what kind of regulation So we've been

19:14

talking a lot about transparency and that

19:16

is very much sort of the the

19:18

the regulation does your if you will

19:20

everybody sing all if we just report

19:22

on the stuff then it'll get better

19:25

will it do? We know that. You

19:28

know it is. One message is is sunshine

19:30

is the best disinfectant so we just put

19:32

it out there. It'll get better. But

19:34

I think that's not the only way. We

19:37

still need to have good old

19:39

Command and Control new know if

19:41

you're emitting too much, we gotta

19:43

cut your emissions. That's that's what

19:45

I saw of Cut My Teeth

19:48

On many, many years ago. But

19:50

I think one of the more

19:52

advanced and potentially more effective ways

19:54

of creating government policy is by

19:56

objectives and incentives, and this is

19:58

what you're seeing in the Us

20:00

with the the the Arab inaccurately

20:02

name's inflation Reduction patch which is

20:04

really the largest climate below the

20:07

world has ever seen as at

20:09

least the Us has ever seen

20:11

in and continues to. Bring.

20:13

Incentives in terms of tax

20:15

credits and direct grants for

20:17

environmental technologies that boost not

20:20

just the environment but help

20:22

the economy as well. That's

20:24

kind of incentive based policy

20:26

that I think really work.

20:29

Tim. Finally, I. Said

20:31

at the start. but where is this?

20:33

will head is? Yeah, it's a great

20:35

question and of course no one has

20:38

a crystal ball spice. When I do

20:40

think about my long career in the

20:42

space and the trend lines I've seen

20:44

is that sustainability is only becoming more

20:47

and more prominent. More and more important

20:49

and more and more embedded an ingrained

20:51

into everyday life. We see it from

20:53

consumer choices on the grocery store shelves.

20:56

We see it in the the halls

20:58

of commerce where we're talking about embedding

21:00

climate into. Financial Reporting. We see

21:02

it in almost every day life

21:04

and so to me that's an

21:06

up and to the right story.

21:09

I've. I've been around long enough to

21:11

know that there's no straight lines in

21:14

any kind of trend is it is.

21:16

There's bumping us and we talked about

21:18

this in terms of the backlash and

21:20

that kind of thing. But I do

21:23

think that trend line of increasingly worrying

21:25

about people in the planet and in

21:27

in integrating that into everyday life is

21:29

where we're heading. That the advice you

21:32

would give leaders. That. Discuss be

21:34

a bumpy past that he that

21:36

is the advice of eager dieters.

21:38

Stick with a stick with your

21:40

eyes because it it does return

21:43

value. And

21:49

thanks for listening! Still

21:55

comes across one has described

21:57

and leave a whereas. The

21:59

soundest else. other people find us too.