Beware the ESG Performance Gap

Beware the ESG Performance Gap

In the May 2013 edition of HBR, Robert G. Eccles and George Serafeim demonstrate the need for companies to incorporate environmental, social and governance (ESG) into their core strategic innovation initiatives.

The ESG performance gap shows the effects of non-strategic implementations.

As environmental, social and governance (ESG) improves, a firm’s financial performance declines — unless ESG is incorporated through strategic and substantial innovation.

At MX Conference 2013, “triple bottom line” was an idea that came up repeatedly. I thought at the time that companies seeking to show performance in terms of profit, people and the planet are bound to venture into misguided efforts. Simply slapping a layer of ESG initiatives doesn’t make a corporation not-evil. And as Eccles and Serafeim show, the increased cost of these efforts will diminish financial performance over time because of the increased cost.

The only exception is for companies that treat ESG as a core part of their innovation work. Firms that make strategic decisions to sensibly innovate their businesses in ways that incorporate ESG will improve their triple bottom line, while most companies are sure to abandon their ESG efforts as they fail to realize return on the investment. I hate to be cynical, but ESG is sure to wind up like every sitcom that added a kid as their ratings faltered.

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