It is no surprise that a political movement led by a corporate “manager” who made “you’re fired” a central principle of his practice of management is attacking contemporary management that seeks to navigate the complex world that organizations confront in 2023. Long before he entered politics, Donald Trump gave me a vivid example I could use in management classes to demonstrate the failure of what I call macho management. While the people he fired on his television show, The Apprentice, were not really his employees, he made termination of staff appear to be a valuable tool of management. Firing people might make for interesting TV, but it is not good management practice. Effective and competent managers treat termination as a failure of human resource and operations management: Either you hired the wrong person, or you so mismanaged a talented person that the excellent employee stopped performing.
ESG management has been overblown by ideologues of the left and right. As with any management practice, there are few absolutes, and ESG principles must be crafted to deal with specific situations. Scoring companies on ESG practices is a little ridiculous, but ignoring or opposing ESG management is even worse. The, practice of management has advanced dramatically over the past century. Accounting, financial control systems, management information systems, just-in-time inventory control, international commerce, operations management, team management, and a host of other innovations have enabled managers to enhance productivity while dealing with an increasingly complex business environment. ESG management is simply another tool for managers seeking to deal with our rapidly changing world.
The basics of ESG are straightforward. The first principle is to focus management’s attention on the organization’s impact on the natural environment. Virtually all human activities have negative impacts on natural ecosystems, so the goal is not to eliminate impacts but reduce them to a minimum. Pollution is a form of waste, and if one applies the principles of total quality management and industrial ecology to production processes, a central goal is to reduce waste in order to reduce cost. In the case of pollution—or waste that impacts an organization’s neighbors—cost can also include liability incurred by damaging someone else’s property. These liability costs can extend to an organization’s supply chain as well.
Being careless about an organization’s environmental impact is an indicator of inadequate management. Just as a construction project riddled with injuries and death is an indication of a poorly run operation, any operation that creates unnecessary risk from pollution indicates poor management. Under macho management, pollution-belching smokestacks are a sign of industrial might. Under this approach, charging ahead without worrying about impact is a sign of strength: “In order to make an omelet you have to break some eggs.” The concept of “breakage” is baked into financial control systems and is assumed to be a routine cost of business. Under environmental sustainability management, precision, control, and care replace the sloppy habits of the early industrial era. An agricultural giant like Land O’ Lakes uses drones, satellite technology, artificial intelligence, and robotics to precisely apply water, fertilizer, pesticide, and herbicide to the plants in its fields. This reduces costs but also reduces pollution of nearby groundwater and streams. The E in ESG is about environmental care and concern.
The second principle in ESG is that organizations need to be mindful of their impact on the local community. This is not a new concept; we see it when we compare the two banks in the classic Christmas movie “It’s a Wonderful Life.” The Bailey Brothers Building and Loan is of and for the community, while Mr. Potter’s bank was only in it for the money. Here in New York, a tone-deaf Amazon.com was unable to site its HQ2 in Long Island City when community leaders rebelled against a multi-billion-dollar subsidy for one of the world’s richest companies.
The third principle in ESG is about corporate diversity in operations and governance. Writing on this issue this past March, I observed that:
“An organization that privileges one race, gender, religion, sexual orientation, or national origin over another reduces the pool of talent it can draw on to staff and manage the operation. We are in a brain-based economy. The high value-added parts of the economy and the greatest profits are in the organizations or parts of organizations that are creative, analytic, and innovative. There’s more money in software than hardware. As products become commodities, they are subject to competitive forces that tend to limit profits. That is why IBM stopped making personal computers. A diverse board and diverse workers will provide the benefit of more brainpower and different life experiences to address organizational challenges. A less diverse organization tends to stimulate insularity and group think. Being awake and aware of the value of diversity is an indicator of management excellence. In a global competition for innovation, customers, and profits, a diverse team that is built on the best talent is likely to beat the team that is more homogeneous but less talented.”
The argument against ESG management is that these factors have nothing to do with generating revenues or reducing expenditures. That they distract companies from increasing profits and are therefore breaking the contract between shareholders and management. To some conservative politicos, they are extraneous and left-wing ideological principles. I do not deny the ideological element of ESG advocacy. It annoys me, but it’s definitely real. Of course, the ideological opposition to ESG by conservatives is more than annoying. It is destructive. My argument is that regardless of the politics, ESG management is about effective management in the 21st century brain-based economy on a planet with over eight billion people. As Paul Simon once wrote: “One man’s ceiling is another man’s floor.” New Yorkers like Paul and me live in apartments and understand crowding. And this planet has gotten crowded. The need for precision and care in management is growing because the impact of mistakes is growing. There was a time when you could dump garbage in the ocean knowing it would decompose and biodegrade. After the invention of plastics and chemicals that were durable and long-lasting for commercial use, waste no longer degraded in the environment and its disposal and treatment became more complex and costly. We benefit enormously from new chemical technologies, but their use often creates environmental issues that must be addressed. If we are going to continue to advance our economy through the development of new technologies, we must learn how to manage those technologies, so they do not cause harm to people and the planet.
In many cases, the argument seems to be less against ESG management than about using ESG factors to guide investment. I think that investors that require ESG management before they will invest are taking a shortcut that is bound to disappoint them. You can have excellent management, including factoring in ESG concerns, but if you’re facing bad market conditions or pushing a terrible line of products, all the ESG practices in the world won’t save you. Investments should never rely on single indicators, and ESG itself is only one element of management. I believe it is necessary, but far from sufficient. The measurement of organizational use of environment, social impact, and corporate governance practices is still in its infancy. We are at about the same place that financial accounting was in the mid-1930s. On the environmental side of the equation, we have not yet developed generally accepted environmental sustainability metrics. The same is true of measures capturing the use of corporate governance, diversity, and community impact principles. Assigning companies ESG scores and then using those scores to guide investment decisions makes no sense.
But delegitimizing ESG factors is at least as bad as misusing and misunderstanding their measurement. We need to get better at understanding these issues and managing organizations in ways that reduce environmental damage, enhance host community impact, and increase organizational brainpower. Most senior managers with business and law backgrounds do not understand these issues. The graduate programs I direct at Columbia University in Sustainability Management (established in 2010) and Environmental Science and Policy (established in 2002) have now educated over three thousand sustainability professionals who do understand ESG issues. Programs at Arizona State, Yale, Bard, the New School, NYU, Harvard, American University, UC Santa Barbara’s Bren School of Management, Duke, LSE, and The University of Toronto (among others) have educated thousands more. These new sustainability professionals have the training needed to turn ESG from aspirational goals to organizational deeds. We are at the start of a new era of management. But we have a lot to learn. Progressives place too much faith in our ability to manage sustainability, and conservatives fail to grasp the importance of these issues to the corporate bottom line. It is sad or perhaps comical when state legislators who know little about management and even less about science try to legislate against what they have decided is “woke” management or “woke” investment. But it is also dangerous to overestimate our ability to manage according to sustainability principles. We are learning, and we are getting better. But we have a long way to go, and a little humility is definitely called for. I am optimistic about our progress but caution against overconfidence. The attack on ESG must be repelled, and the best defense is results and improved organizational performance.
Views and opinions expressed here are those of the authors, and do not necessarily reflect the official position of the Columbia Climate School, Earth Institute or Columbia University.
An astute and very balanced piece, Steve. Inflated notions of ESG on “the left” are far less pernicious than the right-wing assaults that combine climate change denial with fake “anti-woke” bluster.