Beware the 80/20 Governance Trap: Focus on the “G” in ESG

Published today by The Conference Board

Today, The Conference Board posted “Beware the 80/20 Governance Trap: Focus on the “G” in ESG.” Reflecting on the lessons from the Pacific Gas and Electric bankruptcy filing (called “the first major corporate casualty of climate change” by The Wall Street Journal), I ask:

“Are we better off today than we were 20 years ago?”

Considering climate risk globally, the answer is clearly no. We all need a wake-up call.

  • Investors need to recognize there is no free lunch when it comes to ESG. Sorry guys; you need to work much harder to assess how things actually work (regarding ESG) inside companies.
  • ESG Raters need to state the severe limitations on your ability to assess the “G” in ESG. You may be able to assess 80 percent of the “E” and the “S” – but raters capture no more than 20 percent of the ”G” – and governance is by far the most important.
  • NGOs have won the (ESG disclosure) battle but are clearly losing the (climate risk) war. It’s time to do a 180 degree about-face.
  • Boards of Directors and C-suite executives need to look at what happened to PG&E. You love to receive good ESG ratings – but don’t fall into the 80/20 trap.
  • CSOs (by whatever title – including VPs EHS) need to step-up and own sustainability governance. That means driving a new conversation internally.

Analyzing data provided by over 60 major global companies, the article makes a powerful argument that companies can look very good to external raters – yet have serious gaps in their internal risk management processes. Confidential data from 60 companies shows that internal ESG risk management processes are not very mature and not well-integrated into core business processes.

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Gib Hedstrom