Friday, October 14, 2022

Does it matter that ESG goals are hard to measure?

From Steve Hayward:
If businessmen do have a social responsibility other than making maximum profits for stockholders, how are they to know what it is? Can self-selected private individuals [management] decide what the social interest is?
In other words, if managers can pick their own vague performance metrics, expect them to shirk or follow objectives of their own choosing.  One would think that management consultants would recognize this, but look at PwC:
...PricewaterhouseCoopers published a “sustainability survey” of 140 major U.S. corporations, arguing that “companies that fail to become sustainable–that ignore the risks associated with ethics, governance and the ‘triple bottom line’ of economic, environmental and social issues–are courting disaster.” The triple bottom line, PwC concluded, “will increasingly be regarded as an important measure of value.”
To be fair, PwC's Guide to Key Performance Indicators, seems to recommend clear performance metrics: 
Key performance indicators (KPIs), both financial and non-financial, are an important component of the information needed to explain a company’s progress towards its stated goals,
... in addition to "management accountability," and "corporate transparency." But pursuing ESG, with the conflicting "triple bottom line" makes it harder to hold managers accountable. Claiming to be Green is easy.  Doing it is much harder.  And no one wants to talk about the tradeoffs which, as Hayward notes, may be substantial:
Despite its flexible criteria, the DJSI (Dow Jones ESG Index) lagged the Dow Jones Industrial Average significantly. Over the last decade it has achieved an annual return of 5.2 percent, while the DJIA has returned 15 percent per year, and the S&P 500 14.8 percent.
And don't you violate your Fiduciary duty if you follow ESG goals at the expense of profit? 

Here are past blog posts on performance measurement. 

BOTTOM LINE: If you cannot measure it, you cannot control it.

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