YD's Diary #18 Making ESG Sustainable: Separating Mandatory Issues from Recommendations

Over the past two years in my MBA program, I spent a lot of time building my own understanding of ESG. I still have much to learn, but compared to before my MBA, I definitely understand ESG much better now.

While studying ESG, I often wondered, "Can ESG itself be sustainable?" Today, I want to share my thoughts about this. This article comes from only two years of thinking, so please read it kindly as a beginner's challenge.

[Isn't ESG Too Broad?]

When people first learn about ESG, everyone feels differently. But I think everyone agrees that it's hard to define clearly. Even now, ESG means different things to different people. Just look at the "S" (Social) part. The word "social" has a dictionary meaning, but it doesn't give us one clear concept. When we add business management, profits, strategy, and decision-making, problems start appearing from the very beginning.

When you look at many ESG materials, the "S" includes social contribution, community communication, supply chain management, worker rights, DEI (Diversity, Equity, and Inclusion), and many other social problems that nobody has solved clearly. When you see all this, it feels so broad that you might forget the company's original purpose. It's not just "S" - even one small topic inside it has the same problem. When politics gets mixed with topics that have no clear answers, arguments become even stronger.

And then there's the word "Greenwashing." Some people expect companies to do everything good in the world perfectly. If a company has even a small weakness, some people treat it like a lie or even a crime. I think this is too much.

[If ESG Is Too Broad, ESG Itself Won't Be Sustainable]

ESG was created for sustainability, but ironically, I think ESG itself might not be sustainable if it continues this way. Companies should be sustainable and consider ESG - that's right. But we need to think again about the priority of all the items listed under ESG.

Here's my main point: Companies should find ways to be sustainable, and ESG as a top category was chosen very well. But the items under it should be divided into two groups: mandatory ESG and recommended ESG. The rest should be left to companies and shareholders to decide freely.

[Dividing ESG into Mandatory and Recommended Issues]

So what should be mandatory?

Here are the mandatory items I think we need, and why:

- Environment (E) - Water, Waste, and Air

Water, waste, and air should be managed as mandatory. Everything else should be the company's choice based on their profit or voluntary will. We shouldn't force them. Just like water and waste already have legal systems in each country, air (especially CO2) should quickly get regulations, and only that should be mandatory.

Recycling should also be a company's decision based on profit, not an obligation. The government and recycling companies should take responsibility for the rest.

Especially for CO2, I'll write more details later, but we shouldn't just hope companies will voluntarily reach Net-Zero based on goodwill. We should make requirements based on regulation speed and international market competition. Most importantly, companies should focus only on reducing CO2 from their own operations, and the government should solve the CO2 that gets released.

Instead of quickly capturing CO2 and burying it underground, we should invest in utilization technology and facilities. The government can operate these using taxes based on the amount of CO2 produced, creating a recycling system for CO2. The electricity used should come from renewable energy, and the facilities can be operated through joint investment from the government or oil companies. This way, CO2 can be recycled.

- Social (S) - Human Rights and Safety

Only human rights and safety should be mandatory. Things like social contribution, community development, and DEI should be left to shareholders and management's philosophy. It's not right for one company to solve all social problems and then get criticized with "Why didn't you do this?" when they don't meet some group's expectations.

Different companies want to do different social activities. How much social activity a company does should be their own decision, not an obligation. We need to think about this again. I'm not saying doing these things is bad. But I'm sad that these broad requirements hide the real importance of human rights and safety.

If companies focus first on human rights and safety among all the ESG requirements, wouldn't companies become much safer?

- Governance (G) - Following the Law

Governance has no single right answer. Companies just need to follow the law, but even laws are different in each country. So I think we should focus only on whether companies follow the law. The rest should be operated freely by shareholders and companies based on their profits, survival strategy, and founding philosophy.

In Summary,

Current ESG is too broad. It's hard for companies to satisfy everyone's different opinions through ESG. The core mandatory elements of ESG - water, waste, air, human rights, safety, and following the law - should be mandatory. The rest should stay as recommendations, but we shouldn't criticize companies for not doing the recommended things.

Also, Greenwashing criticism should only apply to mandatory items when there's intentional deception.

Again, this is just a beginner's challenging idea after a short ESG experience. I don't know how my thinking will change in the future. If you have any opinions, please share them freely. Thank you.

@UN @ESG

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