They like the cause, just not the name, apparently.
In recent years, work has expanded around sustainability, governance reform, and social impact initiatives like diversity. At the same time, vigorous public debate has surrounded the term “ESG.” Now, new research from Korn Ferry shows that boards are shying away from creating stand-alone ESG committees or incorporating the ESG label into existing ones.
An analysis of committee names on S&P 500 boards found that only three companies used the ESG acronym in 2022. Instead, firms are opting for “sustainability” or similar terms—as 27% of S&P 500 companies did last year (up from 10% in 2016).“The ESG acronym is misunderstood, and it can cause as much confusion as enlightenment,” says Anthony Goodman, leader of Korn Ferry’s North American Board Effectiveness practice, who co-authored the study.
Advocates of ESG efforts have argued that boards need to maintain their commitment by using the acronym. But Lizanne Thomas, head of the corporate governance team at law firm Jones Day, says boards struggle with the idea that each ESG component has a different role and means a different thing to individual companies and investors. “The E doesn’t have anything to do with the S, and the S doesn’t have anything to do with the G,” says Thomas. “It’s unfortunate that all three travel together.”
Typically, boards have three standing committees: compensation, audit, and nominating and governance. But after relying on those committees for many years, some companies have added more that are concentrated around themes like technology, human capital, and sustainability. In the Korn Ferry study, more than 40% of S&P 500 companies changed the name of a compensation committee to include “human capital” or a related term between 2016 and 2022. Similarly, use of “technology” or a related term in committee names increased 50% over the same timeframe.
According to Vini Oliveira, managing director at investor-relations firm Clermont Partners, creating or changing a committee name isn’t just a semantic exercise; it also requires writing or amending that committee’s charter to enumerate its scope and responsibilities. “The biggest criticism about ESG isn’t about its aims, but how they are defined,” says Oliveira.
From the board perspective, words like “sustainability” and “corporate responsibility” are easier to understand. For instance, the use of sustainability increased in popularity as a term in committee names from 16 companies in 2016 to 68 in 2022, an increase of 325%. The largest increase was in the number of standing committees adding sustainability-related terms to their names, growing to 14% of the S&P 500 last year from just 3.3% in 2016. At the same time, the number of stand-alone sustainability committees increased by 86%, to 63 companies from 34.
Goodman says “sustainability” is a more accurate term than “ESG” for assessing a board’s responsibility for long-term value creation. He says sustainability is a part of every aspect of a company and as a result plays a role in overall corporate strategy and risk management. Using that term, he adds, avoids the political connotations attached to ESG. “Boards are looking for other ways to talk about those things that are more readily understandable,” says Goodman.
For more information, contact Korn Ferry's Board Effectiveness practice.
FAQs
Goodman says “sustainability” is a more accurate term than “ESG” for assessing a board's responsibility for long-term value creation. He says sustainability is a part of every aspect of a company and as a result plays a role in overall corporate strategy and risk management.
What is another term for ESG? ›
ESG investing is sometimes referred to as sustainable investing, responsible investing, impact investing, or socially responsible investing (SRI).
What is the new term for ESG? ›
The ESG moniker has become so politicized that it now prevents clear-headed thinking, said Alex Edmans, who teaches at London Business School. He's instead proposing the term “rational sustainability.” It may be bland, he said, but sustainability is about producing long-term value—and that's hard to politicize.
What is ESG in simple words? ›
ESG means using Environmental, Social and Governance factors to assess the sustainability of companies and countries. These three factors are seen as best embodying the three major challenges facing corporations and wider society, now encompassing climate change, human rights and adherence to laws.
What is ESG as a term? ›
The “S” in ESG stands for Social. ESG stands for Environmental, Social and Governance. ESG represents a framework for evaluating an organisation's or investment's impact and practices in these 3 key areas.
What is the jargon of ESG? ›
Environmental, Social and Governance (ESG)
Other possible environmental issues include raw material sourcing (e.g., does the company use fair trade suppliers and organic ingredients?) and whether a company follows biodiversity practices on land it owns or controls.
Why is ESG controversial? ›
One of the biggest criticisms of ESG is that it perpetuates what it was partly designed to stop – greenwashing.
What did ESG replace? ›
Since that time, the terms ESG, CSR, and sustainability have been used interchangeably by companies. ESG has become mainstream, and it is used almost exclusively by those who evaluate a company's efforts to improve its impact on society, the environment, and its employees (institutional investors and regulators).
Is ESG outdated? ›
ESG integration in investment decision-making
However, this approach is now considered outdated and inadequate. Investors are realizing that ESG factors can have a significant impact on a company's financial performance and long-term value creation.
What is ESG investing also known as? ›
ESG investing is a term that is often used interchangeably with sustainable investing, socially responsible investing, mission-related investing, or screening.
This type of ethical investing strategy helps people align investment choices with personal values. ESG stands for environment, social and governance. ESG investors aim to buy the shares of companies that have demonstrated a willingness to improve their performance in these three areas.
What is ESG in a nutshell? ›
What is ESG explained in simple terms? ESG stands for Environmental, Social, and Governance. It is a framework used to evaluate a company's sustainability and ethical impact. How do you measure ESG? First you have to understand the theory of ESG and its factors.
What are the four pillars of ESG? ›
- Answer: - The answer is written below.
- Detailed answer: -
- Quess, a company focusing on Environmental, Social, and Governance (ESG) practices, has four main pillars in its ESG framework:
- Environment:
- Social:
- Governance:
- Compliance and Ethics:
Sustainability, corporate social responsibility, or ESG, all of these terms cover environmental, social, and economical impacts of an organization, as well as it being accountable for its actions.
What is the short form of ESG? ›
Environmental, social, and governance (ESG), is a set of aspects, including environmental issues, social issues and corporate governance that can be considered in investing.
Why is it called ESG? ›
The term ESG, or environmental, social and governance, is well-known in the investor community. It refers to a set of metrics used to measure an organization's environmental and social impact and has become increasingly important in investment decision-making over the years.
What is another name for environmental sustainability? ›
Another term that is almost synonymous with sustainability is ESG, which stands for environmental, social, and governance.
Are CSR and ESG the same? ›
CSR focuses on corporate volunteering, lowering carbon footprint, and engaging with charities. ESG provides a more quantitative measure of sustainability. ESG considers environmental, social, and governance factors. ESG improves the valuation of the business.
Are ESG and sustainability the same thing? ›
While both ESG and sustainability are concerned with environmental, social, and governance factors, ESG focuses on evaluating the performance of companies based on these factors, while sustainability is a broader principle that encompasses responsible and ethical business practices in a holistic manner.
