The genius about Capitalism is that it requires business to do good things for society to make profit.
By Senior Fellow at PepperDine University Andy Puzder
In a recent conversation with my friend, we discussed topics related to careers, industries, and portfolios. Specifically, we attended a career talk featuring speakers from various industries. During the industry insights session, one speaker highlighted the positive outlook in the ESG industry and the potential for a lucrative career in that field.
At that moment, my friend and I couldn’t help but chuckle. Personally, I find it amusing because I believe people wouldn’t engage in charity-related endeavors without some form of incentive. I asked my friend about his thoughts on this issue, and he responded, “OPAC raised energy costs last year, and the entire ESG market hasn’t been performing well since 2019. The change in policies will only add more stress to the ESG industry, as companies will have to work harder to meet those criteria.”
His words made me realize that, despite having some understanding of the ESG industry and initial thoughts on it, I am still far from fully comprehending an industry. This realization motivated me not only to write this short reflection but also to set a goal of regularly researching topics that interest me.
The term ESG stands for Economic, Social, and Governance — a score based on these three criteria. The concept originated from Klaus Schwab, the chairman of the World Economic Forum, who advocated for ESG as a means to save us from an economic system driven by selfish values, such as short-term profit.
However, this raises a paradoxical question. While ESG requires companies to pursue more profit to raise funds and choose suppliers and delivery methods carefully, higher ESG scores may not significantly help a company’s profit growth. ESG grading standards involve multiple facets of operations that may not necessarily contribute significantly to a company’s growth. For example, in the governance (G) criteria, having different individuals serving as founders and CEOs earns higher scores for independence reasons. If strictly adhered to, this practice could hinder companies like Meta, Apple, and Tesla from developing into the successful entities we know today.
Moreover, selecting suppliers compliant with ESG requirements may lead to sacrificing production efficiency for a company. The costs incurred by suppliers to obtain ESG certification could significantly impede their profit and order numbers. When evaluating the true environmental benefits, one must question whether such practices are genuinely worthwhile.
A reduction in a company’s profit implies fewer job opportunities, reduced funding for innovative experiments, and dissatisfaction among venture capitalists and investors. Have you noticed the irony? Job creation and innovation funding also fall within ESG considerations. Additionally, ESG still lacks a comprehensive and consistent set of standards. Different ESG institutions may assign varying scores to the same company. Who should ultimately decide Tesla’s ESG score?
The most intriguing aspect of exploring these thoughts is holding two conflicting perspectives simultaneously and using them appropriately when necessary. The ESG fund established by former U.S. Vice President Al Gore, Generation Investment Management, has consistently outperformed the market in recent years. Many companies, such as TSMC’s efforts to become an Apple supplier, have indeed made significant contributions to the environment while meeting ESG criteria.
In conclusion, I believe the significance of ESG lies in reminding companies that, while doing business, they should not forget their shared responsibility to protect the environment. Any effective execution of a concept requires a well-balanced foundation, whether it’s ESG or life in general.
Feel free to provide any feedback and suggestions, and I welcome the opportunity to exchange thoughts with you! :)
