At US Capital Global, we have been championing social and environmental causes for nearly 25 years. But as a global financial group, we have embraced “sustainability” as the optimal framework for positive change and continuous improvement. US Capital Global Chairman and CEO, Jeffrey Sweeney, explains why.
The recent popular vernacular for expressing the desire for positive social and environmental change is “ESG.” The abbreviation strings together a medley of disparate concepts (Environment, Social, and Governance) in an effort to create an umbrella term for responsible business and investment behavior. Notably absent is the concept of economic health for a business or investment.
Despite the rising popularity of the concept of ESG in recent years, I believe this framework lacks a comprehensive view of society’s needs. My reasons are not political but ecological. They are ecological in the sense of viewing society as an organism that needs to function in a way that ensures its survivability, with the ability to sustain itself in the long run. There are practical, economic principles that champion the interests of businesses, be they small or medium enterprises (SMEs) or large corporations that together form the engine of our economy. In addition to ensuring the economic wellbeing of our society, we also need to preserve and restore our environment and to embrace continuous positive social change.
The ESG model seems to pay scant or no regard to economics. Investors can seek out businesses with high ESG scores, but if these businesses are not economically sustainable, preserving capital, and generating a return on investment, investors lose out. That is not sustainable. To be sure, there is a widespread misconception that ESG is synonymous with sustainability. This is simply not the case. In failing to integrate and emphasize the essential dimension of economics, the ESG model often ends up hiking up business risk and directly opposing sustainability through well-meaning but vaguely defined principles. ESG as currently implemented divorces the aspiration for a better world from the preconditions for its real-life, practical implementation. Because of its vagueness, it fails as a model for generating value for all organizational and societal stakeholders.
A number of investor surveys show mixed feelings for ESG as a basis for investment. According to a PwC investor survey last year, 52% of US investors agreed that ESG performance measures and targets should be included in executive pay arrangements. However, as many as 34% disagreed (with 25% disagreeing strongly). Even more telling is that only 20% of all respondents indicated that they would be willing to accept a lower rate of return on their investment if the company they invested in undertook ESG initiatives. These investors echo my own view. ESG is too vague and amorphous and does not properly integrate financial dimensions to be a reliable, trustworthy framework.
Unfortunately, ESG impels business owners and CEOs to manage two often opposing demands: the growing public pressure to implement imprecisely defined ESG policies and the unforgiving dictates of market economics on a business. Neglect the latter (especially during an economic downturn) and one is swiftly out of business as either an asset manager or a business enterprise. As a direct result, we are seeing businesses, including large global enterprises like HSBC, co-opting and capitalizing on the vagueness in the language of ESG for marketing points. This has led to the phenomenon known as “greenwashing,” which is now ubiquitous across industries. While not supporting misrepresentation of a business’s disingenuous use of ESG, one must recognize that businesses are having to pursue simultaneous and divergent (sometimes even incompatible) objectives precisely because ESG does not integrate an economic central axis into its framework.
Like many other companies, US Capital Global has been consistently supporting environmental, social, and governance causes long before it was called ESG. Countless other businesses have been doing the same, often in recognition that business practices that damage the environment, that are socially inequitable, and that reflect poor governance are ultimately not sustainable. Hence, I believe the concept of sustainability is the key to a better model for ecological and societal improvement. To reiterate, ESG and sustainability are not synonymous. Sustainability is about finding an optimal model for a company or society to function in the long-term while creating value for all its stakeholders. It is directly connected to the enhancement of business value. At the same time, it supports the basic underlying goals of creating an equitable society and promoting responsible and environmentally sound policies and practices.
At US Capital Global, we do prefer to focus on sustainability. We apply this principle in the way we select our investments, build our partnerships, hire our people, and structure debt and equity financing for our clients. Sustainability finds its way into our company ethos and lifestyle choices. We donate to women’s education, support a diversified workforce, and encourage personal choices by example in favoring a more plant-based diet. With a focus on sustainability I believe we can expand the relatability of some of the positive precepts of ESG without alienating investors and businesses.
Jeffrey Sweeney is a fund manager with years of experience in corporate finance and asset management. He is Chairman and CEO at US Capital Global (www.uscapital.com), a full-service global private financial group headquartered in San Francisco with primary offices in Dallas, Philadelphia, Miami, London, Milan, Zurich, and Dubai.