McKinsey points out that objections to ESG overlook the fact that businesses have (and must continue to have) a social license to operate. That is, stakeholders must perceive that a business or industry is acting in a way that is deserving of society’s trust. They ask:
- Does ESG really matter to companies?
- What is the business-grounded, strategic rationale?
More than 90 percent of S&P 500 companies now publish ESG reports in some form, as do approximately 70 percent of Russell 1000 companies.
McKinsey groups the main objections to ESG into four categories: ESG is not desirable, because it is a distraction; ESG is not feasible because it is intrinsically too difficult; ESG is not measurable, at least to any practicable degree; Even when ESG can be measured, there is no clear relationship with financial performance.
The group examined whether companies showing improvement in ESG ratings over several years are showing higher returns to shareholders, as proponents claim. While they find some early signs of correlation, they claim the numbers are inconclusive.
But even with its inherent challenges, what ESG is at its core is crucial to making modern corporate decisions.
Accordingly, the responses to ESG critics coalesce on three critical points: the acute reality of externalities, the early success of some organizations, and the improvement of ESG measurements over time.
Companies should focus on ESG improvements that are based on the evolution of their business models and support them, even if the improvements do not directly lead to higher ratings. And there are tangible risks for companies that don't take any action.
