Why the ESG 'Relevancy Gap' is Bad Business

“Creative PR.” That is how Greta Thunberg, de facto leader of the growing youth climate movement and Time magazine’s Person of the Year, brands corporate America’s attempts to mask inadequate ESG (environmental, social and governance) actions. She regularly accuses the business world of “misleading” people about the authenticity of their sustainability actions in comparison to the scale of their pollution.

As an economist and former CEO, I've spent days reading corporate ESG reports in an attempt to face her challenge. What I found was a glaring gap between their reported ESG achievements and the most basic reporting of financial results.

This type of reporting gap, if found within a public company’s 10K annual report (as mandated for publicly-owned companies by the U.S. Securities and Exchange Commission, or SEC), would raise serious questions of relevancy and materiality based on the accounting industry’s Generally Accepted Accounting Standards (GAAP). Such a gap in a financial report would have to be accounted for in accounting notes or it would not be certified.

Corporate America’s ESG relevancy gap is bad business because it opens the door to competition from disruptive entrepreneurs who win customers by aligning value with values. For example, the traditional food industry now confronts the competitive challenge as consumers gravitate toward meatless burgers sold through fast-food retailers that are price competitive, healthy, tasty and environmentally sustainable. Similarly, combustion turbine manufacturers are losing market share to solar and wind power. Renewable energy now represents half of new utility generating plant additions because it is least cost with zero emissions. And the auto industry is racing to catch up with Tesla, which outsells BMW and Mercedes combined because its all-electric cars deliver on price, performance and zero tailpipe emissions.

ESG initially linked value and values

Back in 2012, corporate America did link business and sustainability performance. One of my most read TriplePundit interviews was with Walmart’s Jeff Rice. What made this interview noteworthy was his linking of Walmart’s financial results to its sustainability initiatives. He powerfully summarized, “Sustainability absolutely supports everyday low prices.”

Rice also explained how Walmart was making over $200 million a year by converting what it used to throw away into cash. And he put forth a sustainable vision, describing Walmart’s self-fulfilling cycle of making money through sustainability action and using this cash flow to invest in additional sustainable best practices that would generate even more money.

But something has changed since 2012. I reached out to Walmart for an update on the financial performance provided by Rice. The response from Walmart’s representative was that I should read the company's ESG report. I explained that I had and, finding little financial data, I was reaching out for help. Their next reply was that I should read Walmart's financial reports. I did. These reports offered little or no links between the company's reported ESG results and its financial results.

Thinking this might just be a Walmart issue, I then began reading other companies’ ESG reports. They were all like Walmart’s. A lot of aspirational goals and stand-alone sustainability performance with little or no context in terms of profitability or sales results. 

Relevancy: The bottom-line focus for ESG reporting

Corporate America is missing a huge business opportunity by not making their ESG reports relevant to consumers and investors. Their reporting fails the millennial generation’s search for businesses that are “cool with a purpose.” They are failing to materially link their financial goals to Generation Z’s demand for change.

How could ESG reporting satisfy expectations that millennials and Gen Z have?

One example would be Walmart reporting on how its California stores are growing sales and profitability within the context of the Golden State’s 2016 public referendum banning plastic bags. I count ten Walmart stores within ten miles of my home. Their parking lots are full of cars. This economist’s guess is that Walmart sales are booming—and realizing measurable cost savings from consumers adopting the sustainable best practice of using reusable bags.

Rather than providing insights that would really gather millennial and Gen Z attention, however, Walmart reports on its 2025 aspirational goals for reducing plastic waste. The retailer does note its current success in recycling 430 million pounds of plastic, but leaves readers to wonder what percentage this recycled plastic is when accounting for Walmart’s enterprise-scale plastic waste stream. The company is silent on how much money it saves from recycling and repurposing their waste streams.

This is just not a Walmart issue.

Corporate America’s continued market share and appeal to investors are at competitive risk if they continue to delink ESG reporting and financial results. This gap will be filled by disruptive entrepreneurship that delivers the authenticity millennials and Gen Z are demanding both at the cash register and within ESG reporting.

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