[Ed. note: ESG in The News will be published tomorrow.]
“People worry about ‘G’ only in a crisis, no one talks about ‘G’ when stock prices are going up.”Shivaram Rajgopal, Accounting professor Columbia University
A few weeks and a couple crises ago, I wrote about FTX and Wells Fargo in relation to ESG failures. Even more news about Wells Fargo hit last week. Now, Silicon Valley Bank (SVB) and Signature Bank failures are the crisis du jour, with Credit Suisse, Republic Banks and PacWest Bancorp teetering on being next.
By now, you have heard that some political leaders have tried to pin SVB’s failures on ESG, DEI and “wokeness”. It is now clear this fingerpointing is just plain silly as the bank’s true problems related to poor capital investment decisions (locking into long term, low return bonds without adequate consideration of changes in market interest rates, leaving an inadequate percentage of capital in more flexible, liquid and market-responsive investments), with old-fashioned fear by account holders who tried to pull their money out of SVB all at the same time (a high proportion of the bank’s account holders had funds that were not insured by FDIC, sparking a high rate of fear). Ultimately, the real failure was the G rather than the E or S associated with “wokeness.” Indeed, the Federal Reserve is specially investigating the fact that SVB has not had a Chief Risk Officer since April 2022.
There is an ESG trickle-down effect, though, but not one you may have expected. The credibility of ESG ratings is once again under attack because SVB was highly rated but failed anyway. I suspect we will see some ratings models get adjusted to give corporate governance more weight. But given how closely most firms hold their ESG ratings methodologies to their chest, we may never know. SVB’s failure may also put more pressure on lawmakers and regulators to implement regulations or oversight measures on ESG ratings. After all, this is the second-largest bank failure in U.S. history – things this big usually end up triggering new laws and regulatory mandates.
What to Do
ESG is such a hot political button right now it is almost the default response given for why anything goes wrong. There are a few practical actions you can take now before a crisis hits to help minimize accusations/blame for “wokeness” as a weakness or failure point in your company. Here are a few things to consider:
- Stay away from politically-charged terms/language. Ngozi recently wrote about problems related to the word “woke” and “wokeness” (I’d like to add the incorrect grammar of the word “wokeness” which really bothers me). It is best for companies to use more concrete words to describe corporate ethos, strategies, products, and services. Some better words are: inclusive, diverse, energy-saving, reduced waste. But don’t forget some of these may have their own legal risk, baggage or be ambiguous as well.
- While E & S issues make headlines and are the topics of many conversation in companies and by investors, you cannot ignore the G. Corporate governance needs to be a part of the business and E&S issues must connect to corporate risk matters. Separating E, S and G into standalone parts – especially when they are not linked back to each other – presents a high likelihood for gaps, inconsistencies and big problems.
- Focus on operational benefits of E & S programs using traditional business measures. I’ve written about this many times and it is covered in depth in my book, but this blog hits the high points. Showing direct value of ESG via old fashioned revenue, cost savings and profit tends to win over critics.
- You may want to review your external messaging on the company’s ESG initiatives and even corporate purpose statements. While talking about stakeholder capitalism was all the rage in 2019, that might now cause legal problems.
- If possible, when completing investor questionnaires, presentations or discussions on ESG, try to orient the conversations/answers to the practical and quantifiable financial ESG value of implemented programs. Those should be more impactful than general discussions about company goals, purpose, ethos or other things that could playing into the politicization of ESG.