IN SEPTEMBER, Apple launched its new iPhone 14, a more costly yet almost indistinguishable model from its predecessor, iPhone 13. Despite the negligible upgrade, consumers buying the latest model will have to get a new phone case due to the shifted locations of the power and volume buttons on the device, which is expected to cause a huge waste of plastic and leather. This largely contradicts Apple’s public claims regarding its contribution to environmental sustainability. However, such greenwashing is not a new phenomenon. Despite the rise of Environmental, Social, and Governance (ESG) which emboldens corporate responsibility to sustainability and equity, many businesses are continuing to make choices that are incompatible with their purported achievements for a better world.

The emergence of the ESG trend

   ESG is a framework that investors use to evaluate a company’s compliance with sustainability. With the issues of climate change, equity, and diversity becoming “mainstream,” ESG has become a buzzword dominating discussions on socially responsible investing. Global ESG assets are expected to surpass $41 trillion by 2022 and $51 trillion by 2025, which is an estimated one-third of the total assets managed globally[1]. Moreover, the concept of ethical consumerism is increasingly shaping consumer expectations, urging firms to uphold the values of environmental sustainability, while respecting all stakeholders involved in business practices, and implementing good corporate governance. 

Profits over sustainability

   Although ESG has managed to raise awareness of the powerful social impacts of businesses, it is often used as a mere tool to create enterprise value or to distract consumers from unsustainable corporate practices. Among many problems associated with ESG—including the fact that it covers a broad range of considerations without a universal standard—is the lack of financial incentives for producers to truly embody the ideals of ESG. After all, in a capitalist society, the primary purpose of business firms is to optimize profits, rather than to create a philanthropic impact on society. It is both cumbersome and costly for businesses to consider non-financial factors by rigorously evaluating and preventing disfavorable environmental impacts of their practices, resisting modern slavery and discrimination, and eliminating bribery, corruption, and lobbying in the workplace. Consequently, firms that put forward sustainability as their brand slogans end up exploiting people’s values to generate revenue while deflecting questions about their problematic track records. 

   For instance, Apple’s alleged cases of forced labor transfers in Xinjiang[2], and the protest by thousands of factory workers at an Apple supplier in India[3] suggest the company’s affiliations with severe human rights infringements. Apple has also been criticized for the short lifespan of its products which leads to frequent disposal; additionally, the iPhone Upgrade Program[4], which encourages consumers to switch their current phones for the latest model, continues to remain highly controversial. Sunkyong (SK) Group, one of the leading conglomerates in South Korea, was also under scrutiny for misconduct related to ESG. Despite SK’s claim to have made “social contributions in various fields,” it has failed to take full accountability for the devastating collapse of the Xe Pian Xe Namnoy Dam in Laos, a joint construction project led by SK among three other financiers. This incident forced thousands of people—who have received minimal compensation for losses of property and farmlands—into overcrowded displacement camps[5].

   The inability of ESG indexes, ratings used to quantify ESG commitments of firms, to accurately reflect such misconducts further aggravates the problem. In spite of numerous controversies, Apple maintains an “A score”—the 3rd highest score out of 7 bands—from the ESG rating provided by Morgan Stanley Capital International (MSCI), an ESG rating agency. Likewise, SK Group has received the second-highest integrated rating from Korea Corporate Governance Service (KCGS) and was awarded the Excellent Sustainability Report in the Korea Sustainability Competition of 2021 after managing to effectively brand itself as an eco-friendly company committing to renewable energy projects[6].

Moving forward 

   For ESG to be more than a marketing tool, it is integral that the methodologies of rating ESG indices are enhanced. For example, many firms deprioritize indices associated with the “social” aspect of ESG due to the ambiguity associated with quantitatively assessing the social performance of a firm. This limitation can be addressed by having ESG rating agencies closely cooperate with Non-Governmental Organizations (NGOs), since NGOs such as Access to Medicine Foundation, KnowTheChain, and Oxfam play significant roles in exposing corporate misbehavior and providing human rights-based framework for ESG, operating independently from corporates’ self-reporting systems. 

   Additionally, ESG misconduct must be closely monitored and regulated by institutions. The United States Securities and Exchange Commission launched a task force last year on ESG and Climate Change to identify ESG misconduct[7], while the EU adopted the “Directive on Corporate Sustainability Due Diligence,”  requiring firms to prevent and mitigate adverse corporate impacts on human rights and the environment[8]. Such institutional changes with binding power are necessary for shaping a just and sustainable economy. 

*                 *                 *

   Although promoting the concept of ESG is a notable attempt made by corporations, the progress made regarding its actual application has proven to be rather disappointing. Clearly, more active discussions, as well as changes in ESG rating and policy measures, are necessary to bridge the gap between the ideal and current reality. Without it, pernicious corporate practices will continue to thrive.

[1] Bloomberg

[2] Washington Post

[3] Reuters

[4] Apple

[5] International Rivers

[6] SK Inc.

[7] U.S Securities and Exchange Commission

[8] European Commission