Is ESG the Latest Trend or a Trend that will lead Businesses Forward?


Much was said about the current generation of job seekers, Generation Y and Generation Z, they are not looking for a single workplace for life, rather their loyalty is based on their connection to the company, they want to define their own tasks and are constantly seeking new challenges.
One might say that the common denominator for all the above, is that these generations are moving away from being “just a cog in the machine” and towards leading and impacting their own lives as well as their roles.
Therefore, it is of no surprise that one of the common parameters in job seeking lately is how much a company is invested in ESG.

I believe most of us are familiar with the term ESG, either as “Environmental, Social, and Governance” or perhaps as the term PPP “People, Planet and Profit” or even as the Hebrew term “Responsible Investment” and though this may seem like a recent phenomenon it so happens that one of the first recorded attempts to establish ESG was in 1919 during the famous ruling of Dodge vs. Ford.
Henry Ford, the company president at the time wanted to convert the special dividend value of the shareholders to an investment in plants to allow the company to manufacture at a lower cost thus reducing the market price and even increasing employees salaries.
The brothers Dodge, who together held 10% of the company’s shares filed a suit against this decision. The court ruled that the company must act in favor of the shareholders and not in favor of the stakeholders. Though the court did not rule in favor of ESG we do have an important quote from Henry Ford: “.. to spread the benefits of the industrial system to the greatest possible number, to help them build up their lives and their homes. To do this we are putting the greatest share of our profits back in the business”.
There is no doubt that Henry Ford was ahead of his time back in 1919, and many managers have come and gone since and today it is very clear that ESG is not a passing trend, but rather a business expectation from corporations, and the place it holds and the part it plays, will only continue to grow.

When we come to examine if a company or corporation is invested in ESG we have to understand what it is within the company’s management we are seeking, the existence of ESG means that besides activity within the company to increase its financial profit, there are also acts initiated by the company to enhance its general welfare.

If we take a look at some of the large companies in the world today we will see extensive activity; Google for example, practices commitment to Diversity, Equity and Inclusion (DEI) and released data on its work force demographics to the public. In 2020 the company channeled 275 million dollars into initiatives of interracial equality, including support for African-American owned businesses and improving the accessibility to education. Another example, is Amazon that invested efforts in supporting its workforce, including increasing the minimum wage for all employees in the US to $15 an hour and granting benefits such as health and parental leave.  

Yes, one can claim and perhaps justly so that these are mega-corporations, with enormous revenue cycles that possibly enables them this type of management, but on the other hand, the understanding that the company has an obligation to its shareholders has become a standard that is expected from any company, for example NASDAQ, back in May 2019 already published a guide for companies that report ESG activity. Another example goes back to February 2022 in Israel when the stock exchange published a Call for Proposal to encourage companies to publish corporate responsibility reports and reports on increasing the percentage of women on their board of directors; the stock exchange took it even further and declared that it would work with an international index editor to develop a designated index for the ESG policy in companies traded on the stock exchange.

These acts of the commercial centers unequivocally indicate a new and powerful segment of investors and mainly international, known as “Impact Investments” or “Sustainable Investments” in the framework of which investors abroad have an increased interest in the environmental and social profit of their investment and not only in the financial profit, and the companies that will not include this segment in their strategic-organizational culture and in their reports, will most likely see the implications in their stock value.

Throughout the years cases have been reported in which a company was prosecuted and the judges’ decisions came from motives of social responsibility as a derivative of duty of care which is the obligation for all board directors and officers in companies. And not only through the Companies Law, but also through Environmental Protection Laws, Antitrust Law, Sexual Harassment Law, Safety Laws and many more.

Verdicts of many judges have been recorded that called to prosecute the corporation, the senior officers, the organizations that acted and committed the offence. In other words, everyone assumes responsibility. Furthermore, throughout the years there have been cases reported of more lenient verdicts, releasing from responsibility and even acquittal of companies that presented proof of establishing control processes and social responsibility in their companies.

How can a company introduce ESG?

Well, it is not simple, but one can easily find several handbooks and guidelines: on the NASDAQ page CEO Adina Freidman was quoted “More than ever, ESG plays a central role in the organizational strategy. However, companies that attempt this transition do so without full disclosure and without the proper tools”; and on the NASDAQ page one can find their guide for reporting ESG and thus in practice understand what to look for and where ESG is to be implemented. 

In addition, one can search for the 2020 Manifesto Davos, a system of principals for corporate governance and responsibility developed by the World Economic Forum:

  • The company’s goal is to engage all its stakeholders in creating a mutual and continuous value.
  • A company is more than an economic unit generating wealth, it fulfills human and societal aspirations as part of the broader social system.
  • Performance must be measured not only on the return to shareholders, but also on how it achieves its environmental, social and good governance objectives.
  • Corporations must pay their share in taxes and contribute to economic development and social welfare of the communities in which they operate.
  • Leaders must undertake to maintain the ethical values and norms and to strengthen all stakeholders, including the environment.

Ultimately, whether a company will keep this up for humanitarian or business reasons, in the long run and over time, its profitable bottom line will show the return. 

 “No one has ever become poor by giving” –  Anne Frank

by Paz Fishman, Project Manager, M&A Department (Mergers and Acquisitions) from Auren Israel