FELICITY HAWKSLEY
In January, UK investment fund manager Terry Smith rounded on consumer giant Unilever, criticising the multinational for its obsession with "publicly displaying its sustainability credentials at the expense of focusing on the fundamentals of the business."
Smith, whose £26.1 billion fund holds - and has held for over ten years - Unilever shares, highlighted the company's decision to promote Hellmann's Mayonnaise as having a "purpose" other than going into your sandwich: that of fighting against food waste.
At its core, Smith's criticism suggested, that companies should only talk about their environmental, social, and governance (ESG) activities if they are demonstrably relevant to doing business. His comments have prompted concerns that there is an "ESG backlash" brewing among investors, and suggest that companies ought to discuss their ESG efforts in more specific (and less rhetorical) ways.
But despite Smith's ire, companies will likely continue talking about the purpose of their products and services in this way. Why? Because there is a fundamental disconnect between the incentives to talk about ESG efforts, and the incentives to actually make the efforts that count.
Empty platitudes
The central issue, according to Tariq Fancy, ex-CIO for sustainable investing at BlackRock, is that ESG exists in two spheres with little overlap.
The first sphere is one of statements - primarily about how much the world has changed and how businesses will deliver net zero and advance social movements because it is their fiduciary duty, rather than just a nice thing to do. In this sphere, Unilever's musings about mayonnaise make complete sense. These statements aren't necessarily untrue: they are either just immeasurable, irrelevant to the bottom line, or so limited in impact as to barely matter at all. At worst, they are a distraction.
For example, two Harvard academics studied the corporate documents of the 181 signatories to the 2019 Business Roundtable (BRT) statement that suggested that all stakeholders, and not just shareholders, matter. The academics found that the statement "was mostly for show and that BRT companies joining it did not intend or expect it to bring about any material changes in how they treat stakeholders."
Shareholders first
The second sphere belongs to analysts and investors, who recognise that the era of shareholder primacy has not passed. Their managers have not encouraged it and governments have not legislated for it. Their calculation is simple: if sustainable behaviour improves the bottom line, it will be integrated into their analysis and rewarded with capital. If it doesn't, then the information will be ignored. Their calculations drive companies' actions on ESG.
The concern is that genuine change to more sustainable ways of working is being held back by a series of gaps that serve to maintain the status quo. First, there is the gap between purpose and profit - between what companies say and what they do. Second, there is the gap between the i
