All the organizations I have worked with over the past two decades—both NGOs and big business—have had a sense of urgency about making progress on environmental and social goals. All have understood that acting on sustainability is not only in society’s long-term best interest, but also can and should be an economic upside to operations.
According to World Wildlife Fund (WWF), one of my previous employers, humans currently consume Earth’s natural resources 1.7 times faster than its ecosystems can replenish. This consumption exists on top of the environmental impacts of climate change, such as increased frequency of drought, severe storms, and flooding. Over the years, Wall Street has not only largely ignored the potential risks of companies operating in this unsustainable state, but also failed to reward companies for actions that add societal and business value. The good news is that this is starting to change.
Investors are increasingly holding corporations accountable for social and environmental outcomes, not just for financial performance. According to the Global Sustainable Investment Alliance, sustainable, responsible, and impact investing in the United States is continuing to rise. Socially responsible investing (SRI) assets at the beginning of 2016 totaled $8.72 trillion—up 33 percent from $6.57 trillion in 2014—representing nearly 22 percent all investment assets under professional management in the United States. Given this trend, we will likely start to see even more companies responding to investor pressure and taking action on important societal challenges.
I welcome this change. Yet, many of the environmental, social and governance (ESG) assessments we use to evaluate SRI strategy investments are oriented around reducing risk, and few seem to take into consideration a more holistic view. Too often, society has come to regret the unintended consequences of well-intentioned decision-making that relies on an incomplete fact base.
For example, bed nets are widely considered one of the cheapest and most effective ways to prevent malaria, a disease that kills at least half a million Africans each year. However, while I was at WWF working on a conservation project in Lake Niassa, I saw that many people were not using them as intended; instead, they repurposed them for fishing nets. These nets—with holes sized for mosquitos and often treated with insecticide—caught all sizes of fish and had a devastating impact on the health of local fisheries, an important source of protein and commerce. Our work focused on improving the health of the local fisheries (via providing untreated nets with bigger holes that caught fish at the right phase of maturity), while also addressing the health needs of local communities.
As I look at the current state of ESG assessments, I see a reliance on metrics that can easily be measured and a focus on controversies as a proxy for risk, rather than a robust understanding of the system in which companies exist. As a result, I am concerned that investors may be inadvertently incentivizing corporate behavior that is neither in society’s collective best interest, nor reflective of their aspirations. If I draw a parallel to my experience in Lake Niassa, it is as if investors have data about the total number of bed nets distributed, but not about how effectively they are used, the health of the local population, or the availability of a sustainable source of food. In this particular push on ESG, investors may demand more bed nets. Will that lead to better outcomes for people? Maybe. Maybe not. We need to look before we leap.
An ESG assessment needs to go beyond risk avoidance, and take into account both business model and corporate strategy. Ultimately, ESG should move toward encouraging companies to adopt a shared value approach, carefully weighing how companies are providing value to society while also providing long-term returns to their investors. So how do we start to develop a more holistic view of ESG? I don’t have all the answers, but drawing on my experience, I propose that good ESG evaluations consider the following four practices:
- Ensure that assessments are comprehensive. Evaluations should take a holistic and measured view of company performance and ESG improvements, and include both tangible milestones and aspirational, long-range goals.
At Walmart, we believe business exists to serve society. Our ESG priorities focus on people—the associates who work at Walmart and the people who produce the products we sell—as well as the planet; our business can create shared value by addressing the ESG issues most relevant for our business. Our investments in associate training, including our recently announced college program, aim to help the company meet the needs of customers today, as well as prepare it for a technology-enabled future. They also provide associates with valuable skills they can use to advance their careers, whether at Walmart or elsewhere.
Comprehensive ESG assessments should get to the heart of how ESG can help drive the business strategy and, in turn, how the business strategy can drive performance on ESG.
- Be guided by sound science. The best thinking available on the interventions, challenges, and desired outcomes needs to inform ESG. This is not desktop research; it involves engaging with subject-matter experts, researchers, and those on the frontline.
With climate change, scientific consensus calls for a rapid de-carbonization of global economic systems in order to keep atmospheric temperatures at safe and manageable levels. Walmart was the first retailer with an emissions-reduction plan approved by the Science Based Targets Initiative (SBTI), a global effort led by numerous NGOs—including Carbon Disclosure Project, World Resources Institute, and World Wildlife Fund—and designed to be in alignment with the Paris Climate Agreement. As part of it, we are working to reduce our own emissions by 18 percent by 2025 and emissions from our supply chain by 1 Gigaton by 2030. In addition to focusing on direct and indirect emissions, in 2017 we conducted our first climate risk assessment, which highlighted potential long-term effects on operations and supply chains, such as increased heating and cooling days, and availability of food commodities due to drought.
ESG assessments should address not only potential risks posed by climate change, but also how companies are driving action up and down their value chain, and lending their voice in support of various policy frameworks like the Paris Climate Agreement.
- Reward positive action. Companies need to adopt more than a “do no harm” approach; they need to take on thorny challenges and put their weight behind a variety of tools—including advocacy, collective action, and philanthropy—to help rewire entire systems. ESG assessments should take this positive work into account.
In the case of social issues in the supply chain, ESG assessments should consider a company’s supplier standards and auditing results, as well as other tools it is using to improve the health of the overall system. To succeed, this may require that ESG assessments develop expertise in specific chains and regulatory environments.
- View controversies in context. With a focus on reducing risk, many ESG assessments put significant weight on controversies—for example, media tying a company to an ESG concern—as a way to potentially assess reputational exposure. But this kind of measurement tends to lack important context. ESG assessments need to consider the relative performance of a company on the issue in question and/or the exposure of other companies to the same controversy.
According to Sigwatch’s “Corporations NGOs Loved and Hated in 2015” report, with the exception of finance, the 10 biggest corporations by market share attracted 50 to 70 percent of all attention by NGOs. It should therefore come as no surprise that Walmart is the subject of a lot of external attention—and controversy. ESG assessments need look beyond headlines to understand the nature of the risk, how widely shared it is across the entire chain, and how individual companies are working to drive change.
Solid, foundational work by the ESG investment community has the potential to be truly transformative over the next few decades. I am more hopeful than ever about our ability to successfully tackle pressing environmental and societal challenges. We have a unique and powerful moment in time right now to come together—as investors, analysts, companies, and civil society—to define the behaviors and norms we want to see from companies in the future. Let’s get started.