By Ian Morris
Could the ever-increasing focus of management teams on ESG issues be distracting them from running their companies successfully? The question was raised this week, as influential fund manager Terry Smith, in his annual letter to investors, turned on Unilever, whose leadership team he said was “obsessed” with its sustainability credentials at the expense of running the business.
Unilever, which has long been a leader in socially responsible business practices, has set itself ambitious environmental and social goals. It believes that this stance will drive better financial results, though its share price has performed badly over the past year.
But Smith suggested that the company was “labouring under the weight of a management which is obsessed with publicly displaying sustainability credentials at the expense of focusing on the fundamentals of the business.” He cited examples such as the decision by its ice cream brand Ben & Jerry’s to stop selling its products in Jewish settlements in the Israeli-occupied West Bank, which caused a huge furore last summer; and mocked the need for mayonnaise brand Hellmann’s to define its purpose (“fighting against food waste”).
Unilever is not the only company that has faced such criticism. Last year Danone’s chief executive lost his job amid claims from activist investors that he had focused too heavily on responsible capitalism to the detriment of shareholder interests. Some investors have claimed that chief executives are using their focus on ESG metrics to justify financial under-performance. There have been calls from some quarters for a return to shareholder primacy on the CEO’s list of priorities and allegations that companies’ sustainability claims are mere “posturing”.
Are we seeing a genuine backlash against the rise of ESG? In short, yes, but in many cases for good reasons.
It is now widely accepted that the principles of stakeholder capitalism are sound. Apart from representing a vital means of business helping our planet out of a pickle, a focus on ESG issues is increasingly fundamental to attracting and retaining investment, talent, and customers – who are becoming more and more influential in punishing businesses for poor behaviour. Public shaming of brands from Nestle to Boohoo are evidence of that.
But the backlash has been fuelled by genuine weaknesses in ESG’s armoury. A lack of evidence of its impact is one of these. Inconsistent data and ways of measuring non-financial metrics contribute hugely to the scepticism around them.
Frequent cases of greenwash are another. A study by two Harvard Law School professors last summer found that the much-lauded statement from the US Business Roundtable in August 2019, signed by the CEOs of most major US companies and affirming their commitment to stakeholder capitalism, had turned out to be “mostly for show” and that its signatories “did not intend or expect it to bring about any material changes in how they treat stakeholders”. By way of example, over two years, corporate governance guidelines amongst signatories had predominantly retained a commitment to shareholder primacy and required that director compensation is aligned with stockholder value, generally avoiding any support for linking such compensation to stakeholder interests.
And what of the accusations levelled at Unilever? Other investors have leapt to its defence, claiming there are many other reasons for its poor financial performance and rejecting Smith’s assertion that a relentless focus on ESG was to blame for it.
But what he did get right was ridiculing the fact that Hellmann’s, a mayonnaise brand for over 100 years, now has the purpose of fighting food waste.
Purpose is laudable when it is genuine and authentic. Brands like Patagonia are examples of this. But most companies and brands are not really driven by any ideological purpose or mission. They are driven by doing what they do well enough to make them financially successful, and all the related benefits that brings.
Despite this, a lot of companies have statements of purpose that are (a) in many cases unnecessary (b) out of kilter with the reality of their business and operations, and (c) often written and forgotten about rather than being translated into actions and behaviours that employees live and breathe in their daily working lives.
This propensity for ill-conceived statements of purpose often leads to ridicule, contributing to scepticism over ESG. It is a shame, because there is absolutely nothing wrong with Hellmann’s fighting food waste. Any efforts to do so should be applauded. This kind of initiative – as long as it is genuine and meaningful, not just window-dressing – is part and parcel of being a responsible business. But being a responsible business and choosing to take on an issue like food waste is not the same as claiming that your defining purpose is to do so.
There is nothing wrong with companies making money, and expressly aiming to do so. Making money creates jobs, investment, feeds the economy and raises living standards. Companies shouldn’t be ashamed of it by pretending their purpose is to bring about world peace or end famine. Businesses can act responsibly and, for example, employ strong diversity and inclusion policies, without claiming that their purpose is to end all discrimination.
Profit and purpose are not mutually exclusive, and should be able to work hand in hand. But to avoid the kind of criticism levelled at Unilever, companies need to do two things.
They must find a way to robustly demonstrate that stakeholder capitalism is producing tangible, real-world impacts on these stakeholders – including the shareholders that still expect financial success.
And they must stop over-stating their commitment to ESG issues with empty promises in the false belief that this is a substitute for transparent, impactful actions and results. It is not.