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OUR BEST IDEAS, QUICK AND CURATED | SEPTEMBER 2, 2022
Edited by Barbara TierneySenior Editor, New York
This week, why the backlash to ESG misses the more sweeping business case for doing it. Plus, three scenarios for the US economy, and Japan’s banks play a bigger role in growth.
The focus on ‘ESG’ (environmental, social, and governance) principles has steadily increased since the term was coined nearly 20 years ago. Companies of various sizes across industries and geographies have been allocating more resources toward improving ESG. More than 90 percent of S&P 500 companies now publish ESG reports in some form, and in a number of jurisdictions, reporting ESG elements is either mandatory or under active consideration for being so. Inflows into sustainable funds rose from $5 billion in 2018 to nearly $70 billion in 2021.
Valid questions. At the same time, a growing chorus of critics asserts that the importance of ESG has peaked. They say ESG is just a distraction from more pressing global matters; it’s not feasible because it’s too intrinsically difficult to measure; and there is no meaningful relationship with financial performance. Others have argued that ESG represents an unstable combination of elements and that attention should focus only on the “E” part: environmental sustainability. In “Does ESG really matter—and why?,” senior partners Lucy Pérez, Vivian Hunt, and team acknowledge these concerns but unpack the business-grounded, strategic rationale.
Valid answers. The article notes that true ESG is consistent with a well-considered strategy that advances a company’s purpose and business model. Long-term value is created from the perception by stakeholders that a business is acting in a way that is fair, appropriate, and deserving of trust. A precondition for sustaining such long-term value is to manage, and address, externalities. Companies can conduct their operations in a seemingly rational way, aspire to deliver returns quarter to quarter, and determine their strategy over a span of five or more years. But if they assume that the base case does not include externalities or the erosion of social license by failing to take externalities into account, their forecasts may not be achievable at all.
A playbook. Organizations that are successful with ESG approach it in a rigorous, strategy-driven, socially attuned way. They make ESG intrinsic to their strategy by defining, implementing, and refining a carefully constructed portfolio of initiatives that connect to the core of what they do. They also contribute to a competitive landscape where good corporate citizenship is marshaled against existential challenges, including climate change. They also act to operationalize ESG throughout the organization, sync it with operations, follow through on initiatives to ensure impact, and discern what the numbers do and do not say about ESG.
While ESG measurements are still a work in progress, there have been advancements in reporting and disclosure, as well as regulation. It is worth bearing in mind that financial accounting arose from stakeholder pull, not from spontaneous regulatory push, and did not materialize, fully formed, along the principles and formats that we see today. Rather, reporting has been the product of a long evolution—and a sometimes sharp debate. Amid a thicket of metrics, estimates, targets, and benchmarks, managers can miss the point of why they are measuring ESG in the first place: to ensure that their business endures, with societal support, in a sustainable, environmentally viable way.
OFF THE CHARTS
The US economy is running both hot and cold, confounding even the most intrepid forecasters. The labor market is as tight as it’s ever been, and inflation remains stubbornly high. At the same time, GDP growth has slowed and consumers are holding back. Is this the end of a boom, the beginning of a bust, or something different? In McKinsey’s latest survey of business executives, more than half said that a recession is due to arrive this quarter or next and will last, in the most pessimistic scenario, for up to five quarters. But nearly half thought a recession could be avoided. At a time like this, forming a view of the economy’s likely direction is even more difficult than usual, so companies ought to avoid a single-point forecast. They can instead consider a set of three scenarios that capture the range of disruptions that could further bedevil the US economy.
INTERVIEW
Careem, the Middle Eastern ride-hailing pioneer, is using AI to provide customers with the most accurate and up-to-date estimated times of arrival by factoring in a host of conditions, including local weather conditions, prayer times, and even iftar times during Ramadan. In this interview with McKinsey, Selim Turki, head of data and AI at the Uber-owned mobility company, talked about what it means to be an “AI first” company and the outlook for AI tech—and talent—in the region.
More on McKinsey.com
Banking on growth: Ensuring the future prosperity of Japan | Following the launch of Japan’s national strategy to revitalize growth, Japanese banks have renewed opportunities to become engines of prosperity by playing various roles in support of growth.
The growth triathlon: Three pathways to extraordinary growth in the consumer sector | For consumer companies to grow fast and profitably, they must expand their cores, tap into adjacencies, and ignite breakout businesses—all at the same time.
Pricing during inflation: Active management can preserve sustainable value | Most industrial companies recognize the need to address inflation, but many lack the capabilities to do so effectively. Managers should build their plans across three time horizons and adjust their strategies with specific tools and techniques.
PARTING QUOTE
BACKTALK
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