In prior posts on this site (for example here), I have expressed my concern that the current hot topic of ESG has a fundamental underlying flaw in that the term lacks definition and that this lack of precision has led to a great deal of sloppy thinking. A recent post on the Harvard Law School Forum on Corporate Governance provides a good examination of these ESG-related concerns. In an October 14, 2022 post (here), Douglas Chia of Soundboard Governance LLC, shows, using cybersecurity as an example, that one of the “biggest flaws” of ESG is “the subjective open-endedness of what counts as E, S, or G.”
Chia opens his article by stating that the problem with ESG is that the “basic concept has morphed into something seriously flawed – elusive to those trying to objectively define it for constructive purposes and at the same time too easily contorted by those with less-than-constructive commercial and political interests.”
Using the issue of cybersecurity as an illustrative example, Chia then shows what a variety of different commentators and observers have said about the possibility of cybersecurity as an ESG concern. Chia shows that various experts have managed to characterize cybersecurity as representing each of the three ESG pillars; that is, that cybersecurity is an “E” issue, or that it is an “S” issue, or that it is a “G” issue.
The problem with this kind of thinking is not just that the various views are all over the map. The real problem is that cybersecurity is its own thing; it isn’t related to and doesn’t at all belong with various other topics that analysts and commentators have already pushed under the ESG umbrella. The obviously widespread concern that cybersecurity somehow must be shoved into a term demonstrates that ESG already bloated to the point of meaninglessness and arguably that the term ESG has far outlived its usefulness.
I have tried to articulate this point of view before, but in his recent blog post Chia put it best:
[W]hat is an ESG issue cannot be endless. What is not ESG? An undisciplined approach to what constitutes ESG will render it meaningless to those who need to understand its importance, and an absence of boundaries makes ESG ripe for manipulation, co-options, and ridicule by those with ulterior motives. Continuing down this path will undermine the concept of ESG as a critical component of business and investment decisions. ESG’s own biggest risk may be that it can be whatever you want or need it to be.
Chia’s point that the imprecise use of the term ESG make the term a target for attack and even ridicule is already apparent in what has been called the ESG backlash. As I discussed in a recent post (here), as many as 14 U.S. states had at that time adopted or proposed legislation that, for example, would prohibit the state’s pension fund from adopting an ESG-oriented investment approach or from working with a money manager or fund that takes an ESG investment approach. In a October 14, 2022 update (here), the Morgan Lewis law firm reports that four more states have now adopted or proposed legislation to prohibit the state from working with ESG funds or with firms that have boycotted certain industries (such as oil and gas or firearms).
From my perspective, it is a real concern that many different people in many different disciplines are frequently using a term for which there is no agree or even commonly understood meaning. My observation is that any two speakers can and often do mean very different things when they use the term ESG, and that has, as I noted at the outset, led to a lot of sloppy thinking and provoked the kind of backlash I described in the preceding paragraph.
I know I am going to take a lot of arrows from the ESG industrial complex for what I am about to say, but here goes anyway. My preferred solution for the ESG problem is that everyone should just retire the term ESG altogether. If you mean “Climate Change,” then just say Climate Change. If you mean “Diversity, Equity, and Inclusion,” say DEI, not ESG. And if your concern is conflict minerals, human trafficking, living wage, or child labor, refer to those issues as such and don’t just lump them together with a bunch of other completely unrelated topics. And, to Chia’s point in his recent blog post, if you mean “cybersecurity,” by all means do not say “ESG.”
And as I discussed in a recent post, a related but slightly different problem with the lack of precision in the use of the term ESG is that it has allowed observers and commentators to try to advance the proposition that ESG quality can be measured and quantified. The quantifiability of ESG quality is another unhelpful illusion that is currently far too widespread.
One final note, from a D&O insurance perspective, is that the question of ESG activity as a factor of D&O liability exposure. The working assumption generally is that ESG risk pertains to ESG laggards, when in fact, it has been the case recently that it is companies that are active on ESG issues that are in fact attracting the claims (as discussed for example here). If we are not going to jettison the ESG label altogether, then we need to recognize at a minimum that ESG is a complex and multilayered category of topics, and the question of ESG-related D&O exposure cannot be assessed simplistically.