Gillian Tett, chair of the editorial board and editor-at-large (US) of the Financial Times (FT), joined David Wilkins, Center on the Legal Profession faculty director, to give her insights into the environmental, social, and governance (ESG) phenomenon. Tett is also the cofounder of Moral Money, the FT sustainability newsletter.
David Wilkins: Let me start with this: around 2019, you started the FT’s Moral Money newsletter. What motivated you to begin that line of reporting, and what was your goal?
Gillian Tett: In the months after Trump’s election in 2016, when the media were completely obsessed with him, I started receiving a lot of emails with a tagline of “sustainability” or “ESG.” I deleted them automatically because, like most journalists, I thought this was kind of hippie-dippie PR move. I used to joke that ESG should stand for “eye roll, sneer, and groan” because that kind of summed up how most journalists thought about it.
But I am also trained as a cultural anthropologist, and at its best, anthropology teaches you to humbly listen to others and see the world through other people’s eyes and not just be blinded by your own prejudices. So, one day I tried that with ESG. I tried to understand why I was getting so many emails and realized that there was a three-part shift going on inside the corporate and business world.
People talk a lot about greenwashing, but I think that 2022 was actually a year of ‘green hushing’ where companies are doing ESG work, but they don’t want to talk about it.Gillian Tett, Chair of the Editorial Board and Editor-at-large, Financial Times (US)
First, companies were realizing that they wanted to do more than just make money—they wanted to have a sense of purpose, particularly after the 2008 financial crisis. Second, finance was realizing that they needed to show what impact they were having on the world when they tried to make returns. Third, governments were running out of money for their development objectives and needed to harness private-sector and philanthropic capital and resources to do it.
Those three things were coming together and promoting interest around the “E,” the “S,” and the “G.” The people who were jumping on board in the private sector were themselves driven by three distinct aims.
First, a tiny minority wanted to actively save the world or change the world, and they were the people who had traditionally been impact investors. They’re still wrongly thought of as being the main people driving it, but they’re not. Rather, what began to change in the 21st century was a growing number of companies began to want to do no harm to the world. They didn’t necessarily want to change the world. But they didn’t want to do harm, which is slightly different. That reflected a growing sustainability voice.
The second aim, which started popping up in 2015 and 2016, were companies and financiers who wanted to use sustainability and ESG as a way of avoiding doing harm to themselves. In other words, they had realized that ignoring ESG issues essentially created reputational damage and regulatory risk—they could lose customers and investors, suppliers, etc. ESG therefore became a tool of risk management as much as activism for a number of corporate boards.
Third, as companies began to realize that it wasn’t just about shareholders in the Milton Friedman way, they began looking more at all stakeholders. As companies began to realize that actually ESG was about risk management, you began to get real mass-market appeal and interest.
From this context, I realized that there really wasn’t any platform that was covering ESG in that way. So, I went to my bosses at the FT and said, “Can we create a platform to do this?” It took a long time to convince them—ESG was all about eye roll, sneer, and groan. But thanks to the Nikkei, the Japanese group that owns the FT, in 2019 I got the funding for it. I called it Moral Money because I felt very strongly that ESG was likely to adapt and evolve over time, which it has.
I’m not convinced creating a blended ESG score for companies is a good idea. What we should be looking for is those three metrics measured differently, and we should recognize that there’s almost always trade-offs between them.
I also called it Moral Money because I was trying to invoke Adam Smith’s The Theory of Moral Sentiments. Indeed, Smith’s ideas on the power of competition to drive innovation, which is seen as the lodestar for free-market capitalism, was preceded by The Theory of Moral Sentiments, arguing that to have effective commerce and competition, you had to have a shared moral framework—and I was trying to invoke that. Unfortunately, many people misunderstood me and thought I was trying to be preachy and moralistic or religious, which I wasn’t at all. I was trying to indicate that there’s another way to imagine capitalism, which is different from the very narrow Milton Friedman perspective. And we started with a shoestring budget, and we were held together pretty much by fumes and tape for the first year. And then gradually it exploded along with the wider marketplace.
Wilkins: I want to pick up on something that you said, because it’s been a question on a lot of people’s minds: Is ESG even a helpful moniker or idea? We kind of get what the E means. The S is completely contested. The G is kind of narrowed down to corporate governance in its most narrow sense: defeating shareholder resolutions. What is the right way about this? Has ESG outlived its usefulness as an organizing tool?
Tett: I would make three broad points. First, that if you ignore the S and you’re pursuing the E, you’re likely to have a political backlash. If you basically go for green and clean at all costs and don’t consider the impact on issues like inequity and exclusion, you will have problems. You need to be mindful of the S if you’re thinking about the E.
Second, if you ignore the G, you can also have nasty problems. What’s happening with Tesla is indicative of this. Tesla is the ultimate E stock with what it’s done with electric vehicles in terms of trying to promote non-fossil-fuel-based cars. But it’s also always had a terrible G record, given that it’s run by a capricious billionaire who keeps changing his mind. You only need to look at what’s happened in the last few months with Elon Musk and his adventures in Twitter and Starlink to see the risk of simply ignoring the G even if you’re focused on the E.
Finally, having said that, I’m not convinced creating a blended ESG score for companies is a good idea. What we should be looking for is those three metrics measured differently, and we should recognize that there’s almost always trade-offs between them. We need to realize both that if any of the three gets a big fat zero, there could well be problems ahead and that you can’t use necessarily rigid frameworks to measure.
So, has ESG outlived its usefulness as a way of talking about the risk management issue? I don’t think it has completely. I would add that while some people say if companies are embracing sustainability and ESG as a risk management metric to save themselves and not save the planet, then that makes the whole thing deeply hypocritical, I’d actually flick that on its head. If the zeitgeist has changed to a point where companies feel that if they don’t try to embrace this new zeitgeist, they’re going to get punished, that shows that the shift in zeitgeist has been very powerful and it’s a huge victory for the original revolutionaries. But I personally prefer to talk about sustainability these days and to break those three letters down.
Wilkins: You’ve already hinted at my next question, which is by concentrating, frankly, on the S, although also on the short-term implications of the E, ESG has now generated an enormous and powerful political backlash. You are no doubt aware of the threatening letters sent to 51 law firms with ESG practices alleging antitrust practices, or the recent decision by Florida to pull its money from BlackRock decrying their “woke” investing strategy. How are you thinking about this?
Tett: To start, this backlash is in some ways a compliment for the movement in that it shows it’s become big enough and mainstream enough for people to actually care, which hasn’t always been true. No one bothered to do this with impact investing because it was so small.
A second point to make is that there’s an extraordinary paradox right now. Even as you’ve had this big backlash—which I was expecting because I’m a great believer in the Hegelian dialectic of thesis-antithesis, and history goes in pendulum swings—what you’ve also had, for the first time, is serious money moving into this space, particularly the renewable energy part. There’s been a huge number of funds putting money into renewable energy, including mainstream industrial companies. This is to say, sustainability is getting legs, which is precisely why people care about it.
And what this has resulted in is my last point: companies, for the most part, are horrified that they’re facing such a checkered geographical landscape. If you look at the map of the United States, it looks a bit like the map in relation to abortion rights, with some states going in one direction and some states going in the exact opposite direction. If you are a company trying to create a unified strategy for America, it’s becoming increasingly hard. And, it is even harder if you’re trying to create a strategy that straddles both Europe and America.
Just as with digital privacy issues, most companies have zero patience, or ability, to create separate strategies for every geographical market. Oddly enough, it’s not so much a regulatory race at the bottom, but increasingly a hedging race to the top in that sense. If Brussels creates tough rules, it’s a hassle for companies to have completely different strategies for Europe and for America, so they tend to overhaul their operations to make sure they’re compliant with European rules, even if they’re not required in the United States. You’ve seen that with GDPR where many American tech companies have become GDPR compliant even though they don’t have to, just because they can’t be asked to cope with many jurisdictions.
This backlash is in some ways a compliment for the movement in that it shows it’s become big enough and mainstream enough for people to actually care, which hasn’t always been true.
You’ll see some degree of that actually happening in the ESG space, particularly around the E. But what has happened is that they don’t often want to talk about it in public now for fear of attracting criticism from all sides. People talk a lot about greenwashing, but I think that 2022 was actually a year of “green hushing” where companies are doing ESG work, but they don’t want to talk about it.
We can see that very clearly in Moral Money. In the first year I had a queue of CEOs around the block wanting to tell me about their amazing new net-zero targets (or more accurately, their PR teams wanted to tell me). And now many of them don’t want to speak in public anymore. Look at someone like Larry Fink—he’s got an activist campaign, which is accusing him of doing too little in relation to ESG and greenwashing, and he’s simultaneously got a pretty noisy activist campaign from North Carolina accusing him of doing too much. You can’t really win. But, in spite of those crosscurrents, the reality is that action is occurring and accelerating, and the focus for most companies now is not on “why” but on “how” when it comes to this space.
Wilkins: I want to ask you about your wonderful book and the phrase “anthro-vision.” As somebody who is in the law and social science domain, I completely agree with you that anthropology is one of the least appreciated but most important lenses through which to look at human behavior. Could you say a little bit about how you think about both that idea of arriving at an in-depth understanding of the culture of institutions and practices, but also this idea of the lateral vision, which strikes me as particularly important for issues like ESG?
Tett: I feel very strongly about this issue of lateral vision as opposed to tunnel vision. In the late 20th century—really starting in the post–World War II era—Western society developed a set of intellectual tools to navigate the world, like balance sheets, economic modeling, and big data. All of the tools that they developed on the back of a computing revolution and the growing maturity of the fashion industry were extraordinarily useful. And they’ve dominated much of the debate at business schools and in the corporate boards in the last few decades. As navigation tools, they are really useful to work out what’s happening in the world, to simplify your ideas, to provide clarity, and to give you a sense of how to move forward. But the issue is that all of those tools have one common flaw: they are bounded and defined by what you put into them.
What you put into an economic model is critical because what you leave out isn’t captured or considered. Same thing, for instance, on what is on a balance sheet. That doesn’t necessarily matter if what you leave out is irrelevant or if assumptions are stable for large periods of history. But in the last 15 years we’ve been living in an increasingly unstable world, though the liberal global order maintains a belief in a severely shaken understanding of free-market capitalism, democracy, and globalization. Increasingly, things that used to be outside our models or in the footnotes of the balance sheet (if you were lucky), like climate change, medical risk, social upheaval, war, and rapid tech change, are now critically important. In some ways they are the model now.
So, when I say that people need to have lateral vision, not tunnel vision, what I’m really saying is that people need to look at the context of economic models and balance sheets and think about what they’re missing. If they don’t, they can end up being someone a bit like someone who walks through the woods with a compass—a technologically brilliant compass! You certainly don’t want to throw your compass away because it will tell you, in general terms, which way you are heading. But if you walk through the woods just staring at the compass and never bother to lift your eyes up and look around, you’re probably going to walk into a tree or trip over a tree root.
That’s a metaphor I use for explaining people who don’t use lateral vision and just use tunnel vision—who just look at economic models or balance sheets—and end up tripping up. That’s why, to put it crudely, ESG has become a tool of risk management when in reality so much of what ESG is about is context and lateral vision. Where Milton Friedman is limited for today’s world is that Milton Friedman is defined by extreme tunnel vision. I think that if Milton Friedman was alive today, he would recognize that a stakeholder vision is needed to protect shareholder value precisely because of this potential for the context to trip people up all the time.
When I say that people need to have lateral vision, not tunnel vision, what I’m really saying is that people need to think about what they’re missing.
The context is different from the 1970s. CEOs in the 1970s only issued shareholder reports every three or six months. That was the only tool that anyone in society had to know what was actually happening. Today you have everything from Glassdoor to carbon emission metrics to tracking satellites to an army of employees talking about what’s happening inside a company. You’ve got supply chain scrutiny. And you’ve got all kinds of NGOs prodding absolutely everything under the sun around companies. The level of transparency is completely different. And so is the ability of people who are angry to complain quickly and loudly. Whether that’s an issue like #MeToo or carbon emissions or pollution, you can actually have companies facing rapid exploding reputational issues, which are very damaging, which can’t be ignored if you want to protect shareholder value.
Wilkins: Speaking of context, as we sit here today, the biggest story in the business news is not directly about ESG but has lots of implications for it. And that’s, of course, about Sam Bankman-Fried and FTX. The part that’s connected to our debate, of which Bankman-Fried was a self-proclaimed follower, is an intellectual movement to try to get people to focus on long-termism. What should companies be grappling with in the short and medium term in terms of how to balance their interests and their shareholder quarterly return alongside longer-term issues? How do they balance the long term and the short term, and what do you see moving forward in these issues?
Tett: I think one of the flaws with the ESG movement when it first started to explode two or three years ago was its failure to clearly recognize that the world is not black and white, or rigidly green and brown, to use another metaphor. In the world of environmentalism, I often say it’s really about olive—a muddy mixture of green and brown. What you’re trying to do is move countries, companies, and people along the olive spectrum from deep brown to being greener. And it’s up to journalists and activists to both keep prodding companies to move but also recognize that even if they’re not green yet, they’re probably a greener shade of olive than they were five years ago. That’s good, but in the same way that you can’t have black-and-white or green-and-brown thinking necessarily in environment, you can’t have black-and-white thinking when it comes to the question of how you create strategy right now.
What ESG has been very slow to recognize is that there are different types of trade-offs. As we started with, there are trade-offs between the E and S and G. But there are also trade-offs between long-term and short-term perspectives. Making trade-offs is really, really, really tough. Walking the middle path—to cite phrases of dialectical behavioral therapy—is what is required to be an adult and a mature individual who knows how to operate in the world. But it’s very, very tough, and it’s something that CEOs are paid to do. What a CEO job really is all about is balancing trade-offs. But it’s beholden on everybody right now to come out and be honest and transparent and open about that. We are in a world of trade-offs: We’re doing X. We’re doing Y. And we’re trying to do our best. We may not always get it right, but we’re trying.
Similarly, it’s on journalists and activists to recognize that companies, for the most part, are engaged in trade-offs. Yes, there is massive greenwashing. Yes, there’s “woke washing” and PR spin. And yes, some of that is driven by very bad motives. But some of it occurs because companies are trying to engage in hard trade-offs. I think companies should try to have long-term perspectives. Obviously, investors should reward that. But obviously, it’s not going to happen tomorrow.