The Evolution of ESG | Four Versions of Environmental, Social & Governance Performance in Business
As a sustainability professional, I’m routinely asked about the latest sustainability acronym — ESG, the environmental, social, and governance aspects of corporate performance. Figure 1 shows what I characterize as the four versions of sustainability in business as they have evolved over time: (V1) Corporate social responsibility, (V2) eco-efficiency, (V3) environment, social & governance factors, and (V4) regeneration. This model comes from my work and observations as a sustainability professional since 2004 when I first discovered green building.
When people ask how companies are doing with ESG, or what they ought to be doing, I start here.
Corporate Social Responsibility (CSR) — V1
With the Industrial Revolution booming in 19th century Europe and the United States, there was also a parallel and growing concern for worker well-being.[1] While some of this may have been self-serving for industrialists (losing workers and productivity), there was a general consensus that wretched working conditions, especially for women and children, were untenable and led to grave social problems and entrenched poverty.[2] Late 19th century industrialists like Andrew Carnegie gave enormous sums of money to religious, scientific, and educational causes, and John D. Rockefeller alone donated more than $500 million of his fortune.[3] While the largesse was laudable, it was voluntary, and there was no obligation for employers to demonstrate care for workers.[4]
In 1953, Harold Bowen coined the term “corporate social responsibility” in his book, “The Social Responsibilities of the Businessman.”[5] The book was the first to discuss the obligations business had to its employees and stakeholders, and the idea of corporate social responsibility (CSR) grew in the 1950s and 1960s with the rise of multinational corporations.[6] In 1971, the non-profit Committee for Economic Development introduced the idea of the social contract between business and society — that companies exist by “public consent,” and as such, they must contribute back to society that provides them with educated workers, infrastructure, law, order, and stability.[7]
Throughout the 1990s, the idea of CSR gained currency, and by the early 2000s, major companies like Walt Disney, Wells Fargo, Coca-Cola, and Pfizer had incorporated CSR into their businesses.
Present-Day Examples of CSR
In its 2020 sustainability report, ExxonMobil (Exxon) emphasizes CSR reporting (V1) and eco-efficiency (V2).[8] In its “Community investments” section, Exxon says it “spent” $253 million globally in 2019.[9] Like other oil-and-gas companies, Exxon is also highly focused on reducing carbon- and methane-intensity in its operations (scopes 1 and 2 emissions). All this is great, yet it skirts the real work of reducing end-product greenhouse gas emissions (GHGs, also known as scope 3 emissions, or the emissions cars and houses emit when they use gas.)
On the other end of the CSR spectrum is Amazon. In the highly competitive search for its HQ2, Amazon chose Long Island City, N.Y., as its next hub, but the backlash was so fierce and promised to be so enduring that the company rescinded its offer.[10] Critics of the relocation cited the company’s anti-union stance, worker exploitation, and soaring real estate prices from the move, all while the company would be heavily subsidized by state and local governments.[11] In other words, the company was perceived as a net taker, not bringing anything of greater value to the new location.
CSR is not a nice-to-have. In fact, it’s standard operating procedure now. When companies are perceived as taking and giving little to nothing in return to the communities where they’re situated, they’re turned out like Amazon in New York City.
Eco-Efficiency — V2
Established as an organization for sustainability in business, the World Business Council for Sustainable Development (WBCSD) first used the term “eco-efficiency” in 1991.[12] Essentially, the term was about business productivity, that business could create more goods and services with fewer input resources and less output waste and pollution.[13]
“As defined by the WBCSD: Eco-efficiency is achieved by the delivery of competitively priced goods and services that satisfy human needs and bring quality of life, while progressively reducing ecological impacts and resource intensity throughout the life-cycle to a level at least in line with the earth’s estimated carrying capacity. In short it is concerned with creating more value with less impact.”[14]
As a result, the 1990s saw a new vigor and focus on energy efficiency with aligned organizations popping up like mushrooms — this a mere 20 years after building energy codes were first codified in the United States. A joint program between the United States Environmental Protection Agency (EPA) and the Department of Energy (DOE), the ENERGY STAR program was born in 1992 to provide a higher standard of energy efficiency for appliances.[15] The program now also covers HVAC, buildings, homes, and construction products like windows, doors, and lighting.[16]
In 1998, the U.S. Green Building Council launched the LEED (“Leadership in Energy and Environmental Design”) program with a broad menu of requirements and optional credits for what constitutes green building.[17] And in 1996, the International Organization for Standardization (ISO) created the 14000 set of standards “to help companies address their environmental impact.”[18]
Eco-efficiency is important and good business practice. As the sole means of reducing natural capital use, though, it’s ineffective and can be completely offset and surpassed by volumetric increases in production.
Present-Day Examples of Eco-Efficiency
IPIECA, the International Petroleum Industry Environmental Conservation Association, is a non-profit focused on helping the fossil fuel industry with its environmental performance.[19] Among IPIECA’s many initiatives is its laser focus on cutting carbon- and methane-intensity of its products — normalized numbers like “X grams of carbon per barrel of oil, therm of gas,” etc. Major oil and gas companies, including Exxon, Shell, and bp, are members and tout their performance against IPIECA’s emissions goals.
The ENERGY STAR Portfolio Manager database is an online tool to benchmark building energy performance, and municipalities across the country measure how the buildings in their jurisdictions stack up against the national database.[20] The tool doesn’t create energy efficiency per se, but it is used by jurisdictions like X-rays to see inside buildings’ energy use. For example, the City and County of Denver will start requiring building upgrades for laggard properties based on data recorded in Portfolio Manager.[21]
Environmental, Social & Governance Performance (ESG) — V3
The ESG acronym leapt into broad use from a 2004 conference of 20 financial institutions managing over $6 trillion in assets.[22] The UN Global Compact hosted these organizations at its “Who Cares Wins” conference with the goal of addressing environmental, social, and governance impacts that feed financial market research, analysis, and investments.[23]
One of the big takeaways from the conference is that companies doing ESG well can increase shareholder value, manage risks, anticipate regulatory action, or even access or create new markets all while contributing to sustainability value in places where they operate.[24]
Present-Day Examples of ESG
B Corporations, business entities that voluntarily certify their ESG performance, now number over 4,000 companies in 77 countries.[25] The B Corp registry shows no-surprise companies like Ben & Jerry’s, Danone, Seventh Generation, and Patagonia.[26]
In 2011, the Sustainability Accounting Standards Board (SASB) formed to provide financially material accounting guidance for sustainability metrics across 77 industries.[27] Now SASB is a robust sustainability disclosure system in its second iteration for SEC-compliant corporate reporting like 10-Ks.
The TCFD, the Task Force for Climate-related Disclosures, is yet another voluntary framework for corporate reporting that focuses on scenario analysis, an important exercise in enterprise risk management (ERM), and one application of ESG analysis belongs in ERM.[28]
While ESG reporting has been voluntary and until recently niche, that is changing — FAST. The European Commission of the EU inked in June a taxonomy for sustainable activities that must be reported by financial institutions there.[29] The taxonomy has six environmental objectives: (1) climate change mitigation, (2) climate change adaptation, (3) sustainable use and protection of water and marine resources, (4) transition to a circular economy, (5) pollution prevention and control, and (6) protection and restoration of biodiversity and ecosystems.[30]
On this side of the pond, Treasury Secretary Janet Yellen has labeled climate change the single biggest risk to the U.S. financial system.[31] As head of the Financial Stability Oversight Council (FSOC), she has until November 2021 to respond to Pres. Biden’s executive order to recommend climate-risk and GHG emissions reporting by publicly traded companies.[32] Secretary Yellen has unequivocally stated that she thinks anything less than full disclosure and transparency on these topics is unacceptable.[33]
And on June 28th, the China Securities Regulatory Commission (CSRC), the Chinese counterpart to the U.S. Securities and Exchange Commission (SEC), mandated that Chinese domestic companies must add ESG disclosures to annual financial reporting.[34],[35] These include “pollution emission situations,” environmental impacts, and environmental penalties assessed.[36],[37] The CSRC also encourages companies to disclose how they’ll reduce carbon emissions to meet the state goal of carbon neutrality.[38]
Three of the world’s largest markets — the United States, the EU, and China — will have ESG reporting requirements mandated by year-end.
The Decarbonization Bridge
With the United States’ reentry into the Paris Agreement, President Biden committed to reducing U.S. GHGs from 50 to 52 percent by 2030 (compared to 2005 levels), with net-zero emissions no later than 2050.[39] The EU promises 55 percent reduction by 2030 (below 1990 levels).[40] And China says its emissions will peak by 2030, achieving carbon-neutrality by 2060.[41]
GHG emissions reporting and transparency is happening globally, and the race is on to decarbonize. I see this mass exodus from fossil fuels as a bridge to regenerative solutions, which require renewable energy systems that preserve other systems’ health. Energy giant bp intends to reduce its overall hydrocarbon production 40 percent by 2030 and increase investment in low- and no-carbon products and ventures like bp Wind Energy and carbon capture and storage (CCS).[42] This is consistent with its “net-zero-carbon-by-2050” goal.[43]
Regeneration — V4
In 2015, erstwhile financier John B. Fullerton came up with the concept of “regenerative capitalism” in his book of the same name. Fullerton’s work identified the regeneration that occurs effortlessly in systems, especially natural systems.[44] This is Fullerton’s core idea towards a regenerative economy:
“ The universal patterns and principles the cosmos uses to build stable, healthy, and sustainable systems throughout the real world can and must be used as a model for economic-system design.”[45]
The concept of regeneration first appeared on my radar circa 2013 with the International Living Future Institute and its Living Building Challenge (LBC) certification. LBC and affiliated certifications require that homes and buildings give back more than they take — energy, clean air, water, food, health, and well-being.[46] In addition to accounting for operational use over the life of a building, LBC also looks at embodied carbon — carbon involved in the harvest, manufacture, and transportation of building materials.
Regeneration flips the script from net withdrawals or harm to the biosphere to positive net contribution.
Present-Day Examples of Regeneration
The Bullitt Center is a six-story building in central Seattle that has the Living Building Challenge certification.[47] That means that the building is net-positive energy, generating more energy than it consumes. The roof has 244 kWs worth of solar photovoltaic to create power onsite. The building is made of mass timber, not steel, and a rainwater cistern collects all the water the building needs.
Regenerative agriculture is a philosophy of farming that enables farmland to do what it does best — produce bountiful, nutritious food in ways that create no harmful side effects.[48] Regenerative ag restores soil health and quality, minimizes use of pesticides and fertilizers, helps soils better retain water and nutrients, restores biodiversity, and even sequesters carbon (“carbon farming”).[49]
In Sum
As a field of study, sustainability is relatively new, and the early concept of CSR isn’t even three generations old. Yet new ways of doing ESG are literally changing with news cycles.
Business transformation needs to happen yesterday to stave off the worst effects of climate change. It’s imperative we do everything we can to help business evolve into (at minimum) ESG and preferably regenerative modus operandi.
[1] (THOMAS, 2021)
[2] (THOMAS, 2021)
[3] (THOMAS, 2021)
[4] (THOMAS, 2021)
[5] (THOMAS, 2021)
[6] (Bowen, 1953)
[7] (THOMAS, 2021)
[8] (Exxon Mobil Sustainability Report Highlights, 2021)
[9] (Exxon Mobil Sustainability Report Highlights, 2021, p. 27)
[10] (Goodman, 2019)
[11] (Goodman, 2019)
[12] (World Business Council for Sustainable Development, 2000, p. 1)
[13] (World Business Council for Sustainable Development, 2000, p. 3)
[14] (World Business Council for Sustainable Development, 2000, p. 4)
[15] (UNITED STATES ENVIRONMENTAL PROTECTION AGENCY, UNITED STATES DEPARTMENT OF ENERGY, n.d.)
[16] (UNITED STATES ENVIRONMENTAL PROTECTION AGENCY, UNITED STATES DEPARTMENT OF ENERGY, n.d.)
[17] (Sustainable Investment Group (SIG), 2016)
[18] (Kenton, 2019)
[19] (IPIECA, 2021)
[20] (UNITED STATES ENVIRONMENTAL PROTECTION AGENCY; UNITED STATES DEPARTMENT OF ENERGY, n.d.)
[21] (Collins, 2021)
[22] (U.N. Global Compact, 2004, p. 1)
[23] (U.N. Global Compact, 2004, p. 1)
[24] (U.N. Global Compact, 2004, p. i)
[25] (B Lab, 2021)
[26] (B Lab, 2021)
[27] (SASB history, 2021)
[28] (TCFD | TASK FORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES, 2021)
[29] (European Commission, n.d.)
[30] (European Commission, n.d.)
[31] (Ennis, 2021)
[32] (Ennis, 2021)
[33] (U.S. DEPARTMENT OF THE TREASURY, 2021)
[34] (Caixin, 2021)
[35] (Saiyid, 2021)
[36] (Caixin, 2021)
[37] (Saiyid, 2021)
[38] (Saiyid, 2021)
[39] (THE WHITE HOUSE, 2021)
[40] (European Commission, n.d.)
[41] (Climate Action Tracker, 2020)
[42] (bp sustainability report, 2020, p. 30)
[43] (BP 2019 annual report, 2019, p. 6)
[44] (Fullerton, 2015, p. 6)
[45] (Fullerton, 2015, p. 8)
[46] (INTERNATIONAL LIVING FUTURE INSTITUTE, 2021)
[47] (INTERNATIONAL LIVING FUTURE INSTITUTE, 2021)
[48] (GroCycle, 2021)
[49] (GroCycle, 2021)
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