Podcast Summary
Is Business Broken?
Episode: Revisiting ESG: How Did We Get Here?
Host: Kurt Nickish (A)
Guests:
- Eddie Riedel, John F. Smith Jr. Professor in Accounting at BU Questrom (B)
- John Stroyer, Former Chair and CEO of Calvert Research and Management (C)
Date: May 9, 2024
Episode Overview
This episode explores the historical evolution and foundational forces behind ESG (Environmental, Social, Governance) as a framework for corporate responsibility and reporting. The discussion delves into how societal, investor, and regulatory pressures have pushed companies to consider issues beyond mere profit, tracing the narrative from early accountability mechanisms to the global rise of ESG standards. The conversation ties in the challenges, progress, and misconceptions that shape the ESG landscape today.
Key Discussion Points and Insights
1. Early Foundations of ESG Thinking
- Historical Accountability: The roots reach as far back as the 1600s with Dutch East Indies companies, where investor mechanisms for transparency and accountability emerged.
"Even back then, there were the beginnings of mechanisms for investors to understand what these companies were doing and to hold companies accountable..." — Eddie Riedel [01:34]
- Examples of Early Social Pressure: Focuses included child labor in the Industrial Revolution and consumer boycotts during apartheid in South Africa.
2. Modern Catalysts for ESG
- Globalization and Supply Chains: The expansion of companies into multiple jurisdictions exposed regulatory discrepancies and brought issues like child labor (e.g., Nike in Southeast Asia) to public attention.
"As globalization popped up, ESG related issues became much more prominent and much more aware." — Eddie Riedel [02:41]
- Increasing Salience of Climate Risks: Real-world impacts like wildfires, droughts, and insurability crises (e.g., in Florida) made the environmental aspect of ESG urgent.
- Emergence of the Term "ESG": The United Nations played a central role; the 2006 UN Global Compact and the Principles for Responsible Investing formalized the triad of environmental, social, and governance criteria.
"The concept of categorizing corporate behaviors...was created and the term ESG was coined." — John Stroyer [03:59]
3. The Evolution of Corporate Reporting
- Beyond Financials – The Balanced Scorecard:
- Introduced in 1992, it revolutionized the mindset from pure financials to multidimensional performance metrics, paving the way for ESG thinking.
- Allowed for strategic links between non-financial metrics and core operations.
"That was a big 'whoa' kind of moment... It was the systematic structure of how to think of broad categories and how to assess the categories and then link them all the way through strategy..." — Eddie Riedel [06:28]
- Slow and Uneven Adoption: Companies and industries adopted these concepts at differing rates; standardization remains ongoing.
4. Pathways to Standardization
- Historical Precedents:
- The Great Depression spurred standardized financial reporting (SEC’s creation in the US, 1929–30).
- The early 2000s saw harmonization through International Financial Reporting Standards (IFRS), facilitating global investment comparisons.
"What we're seeing with ESG is just this pattern that replays...I think we're in the fourth or fifth inning of the game." — Eddie Riedel [10:48]
- Externalities and Corporate Transparency:
- ESG seeks to quantify and disclose impacts traditionally omitted from financial reports (e.g., pollution, carbon emissions).
"One of the ways that I understand ESG is an effort to understand and quantify the externalities that a given company exerts on society..." — John Stroyer [11:30]
5. Is ESG Evolutionary or Revolutionary?
- Quantum Leap Potential:
- True change, especially around carbon pricing and cross-border coordination, requires a step-change in both practice and global cooperation.
"If we begin to cost this in, it’s a quantum leap..." — John Stroyer [13:16] "It is a quantum leap, because this is one of the first times...there’s a coordination that needs to occur across regimes." — Eddie Riedel [14:24]
- Challenges:
- Some players act unilaterally, prioritizing their own interests, making collective action difficult.
- Metrics and reporting standards for ESG are still maturing and can lack comparability.
6. Are We Making Progress?
- Evolution of Standards:
- Movement is gradual, mirroring past shifts in financial and global reporting: starts with voluntary disclosures, followed by best practice sharing, and finally regulatory intervention.
"Regulation, for good or for bad, is typically reactive, not proactive." — Eddie Riedel [16:49]
- Successes in ESG:
- Carbon and methane measurement/emission disclosures are the most mature and impactful area—though standardization and enforcement remain incomplete.
"If we took all the work associated with creating ESG standards and...prioritize the most important thing...I would vote for doing it on carbon and methane." — John Stroyer [17:58]
- SEC Filings and Granularity:
- SEC-mandated 10K filings show increasing ESG risk detail and evidence of companies learning from and adopting each other's practices.
"One thing we've noticed is that over time the companies are reporting more and more information regarding their ESG risks. The information is getting more granular..." — Eddie Riedel [20:03]
7. The Road Ahead
- Anticipation of Major Change:
- The "middle innings" are getting more exciting—with potentially massive economic shocks related to environmental change propelling the next phase of the ESG movement.
"It is about to get very, very exciting. And that's exciting as a double-edged sword, isn't it?... The implications and impact...for so many different domains of society are really incredible." — Eddie Riedel [21:34]
- Pricing Externalities – Acid Rain Precedent:
- The "acid rain" case in the US demonstrates how pricing negative externalities can drive innovation and problem-solving, providing hope for carbon pricing’s effectiveness via ESG transparency.
"We did it by pricing those emissions...there was a clear price point that entrepreneurs and innovators could work against." — John Stroyer [22:55]
Notable Quotes & Memorable Moments
-
On ESG’s Historical Roots:
"There is a very long history here besides what we're seeing currently...even back to the 1600s..." — Eddie Riedel [01:34]
-
On UN's Role in Modern ESG:
"The concept of categorizing corporate behaviors into things that impact the environment, into things that impact social outcomes and into corporate governance...was created and the term ESG was coined." — John Stroyer [03:59]
-
On the Balanced Scorecard’s Significance:
"The balanced scorecard's big insight... was to get companies internally to think about, well, what if you don’t just focus on financial measures?...That’s really what the biggest insight of the balanced scorecard was meant to do." — Eddie Riedel [06:28]
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On the Current State of ESG Reporting:
"One thing that we've noticed is that over time the companies are reporting more and more information regarding their ESG risks...The information is getting more granular." — Eddie Riedel [20:03]
-
On Capitalism’s Role and Misconceptions:
"Capitalism, when it’s done right...is very good at coming up at very creative solutions to very thorny problems...It can be a very, very big mobilizer to getting to good solutions." — Eddie Riedel [24:55]
-
On ESG and Politics:
"I think the biggest misconception today about ESG is that it is some kind of a political...It really is an effort to improve how capitalism works, strengthen the system..." — John Stroyer [26:21]
Timestamps for Major Segments
- [01:34] – The historical roots of holding companies accountable
- [02:41] – Globalization and ESG’s prominence
- [03:59] – The UN and the coining of ESG
- [06:28] – The balanced scorecard and non-financial metrics
- [10:48] – Precedents for standardization in financial reporting
- [11:30] – ESG as a way to report and address externalities
- [13:16] – Is ESG an evolution or a quantum leap?
- [17:58] – Most successful ESG focus areas today: Carbon and methane
- [20:03] – ESG trends in SEC 10K filings
- [21:34] – The future trajectory and potential shocks
- [22:55] – Acid rain analogy and market solutions
- [24:55] – Clearing up misconceptions about capitalism and ESG
Conclusion
This episode positions ESG not as a “woke” or political trend, but as an evolutionary—perhaps even revolutionary—step in the ongoing journey of capitalism addressing externalities and complex global challenges. The conversation frames ESG as both a continuation of historical accountability efforts and a leap into a future where coordinated global action and data-driven reporting are essential.
For further discussion on how ESG plays out in practice, tune in to the next episode.