The Changing Dynamic of ESG Consideration within Corporate Sustainability

Overview:

 A recent Harvard Business School article explored the impact of ESG issues on corporate profitability, presenting a framework tracing their evolution to pivotal factors. Using Purdue Pharma as a case study, it highlights increased understanding of ESG materiality, with companies measuring and reporting on ESG data. The framework offers insights for entities balancing financial and societal motivations, stressing the catalyst role of designating ESG issues as "financially material." The authors aim to shift perception towards proactive management of emerging ESG issues in corporate decision-making.

Summary:

A recent article published by Harvard Business School titled “How ESG Become Financially Material to Corporations and Their Investors” delved into the relationship between ESG issues and their substantial impact on corporate profitability and valuation. The authors proposed a comprehensive framework to elucidate the nuanced journey of ESG concerns, revealing how they transition from being perceived as non-financially material to becoming pivotal factors shaping corporate outcomes. This framework is particularly pertinent for entities motivated by both financial considerations and societal impact, providing actionable insights for companies, investors, regulators, NGOs, and impact-first investors.

The authors discussed a specific case study involving Purdue Pharma,  where they were involved in the manufacturing of OxyContin and contributed to the opioid epidemic. The example underscores how an ESG issue, notably ethical marketing within the pharmaceutical industry, evolves from a traditionally non-financially material concern to one exerting a profound influence on corporate profitability and valuation. The societal implications of the opioid epidemic prompt a paradigm shift in the perception of ESG issues, emphasizing the need to understand their materiality for both financial and societal reasons.

The authors highlight the noteworthy advancements made over the past decade in comprehending the materiality of ESG issues. This period has witnessed a substantial uptick in companies measuring and reporting on environmental, social, and governance data. Moreover, industry-specific standards established by the Sustainability Accounting Standards Board (SASB) in 2018 have played a pivotal role in mainstreaming the consideration of material factors in ESG analysis. The proposed framework, encapsulated within the article, aims to offer valuable insights into the evolution of ESG issues into financial materiality. It provides a theoretical basis for actors prioritizing social progress, such as governments, regulators, NGOs, and impact-first investors, as well as a practical approach for companies and return-first investors focusing on economic outcomes.

The article underscores the significance of designating ESG issues as "financially material," as it serves as a catalyst for corporate attention, disclosure, and resource allocation. It discusses the growing interest in understanding materiality as a means to shape corporate strategies, guide investment decisions, and inform regulatory frameworks. The framework presented in the article delineates five distinct stages in the evolution of ESG materiality: the status quo, catalyst events, stakeholder reactions, company responses, and regulatory interventions, culminating in innovation. This structured approach aims to enhance our comprehension of how ESG issues become financially material over time.

To summarize the article,  authors expressed their hope that by shedding light on these materiality pathways, the perception of materiality will transition from a static "state of being" to a dynamic "process of becoming" over time. This shift in perspective is envisioned to promote proactive management of emerging ESG issues, fostering a more holistic and adaptive approach to navigating the intricate landscape of environmental, social, and governance considerations in corporate decision-making.

Sources:

https://www.hbs.edu/ris/Publication%20Files/20-056_1c21f28a-12c1-4be6-94eb-020f0bc32971.pdf