Why Having Holes in Your ESG Policy can Lead To Failure: What Can we Learn From SVB and FTX.
In recent years, the importance of ESG governance has grown significantly, as investors increasingly recognise the risks and opportunities associated with sustainability issues. Companies that do not have effective ESG governance may find themselves at a disadvantage when it comes to attracting investment, managing risk, and maintaining their reputation.
Unfortunately, there have been several recent ESG controversies involving well-known companies such as SVB and FTX. These controversies have highlighted the importance of effective ESG governance and the risks of failing to address these issues.
However, there are several “sins” or common mistakes that companies make in their ESG management that can lead to financial failures and negative impacts on their reputation and bottom line.
The Seven Sins of ESG Management, as outlined in multiple sources, include:
- Excessive focus on ratings: Some companies place too much emphasis on improving their ESG ratings from rating agencies, rather than focusing on actual improvements in their sustainability and ethical practices.
- Failure to integrate ESG into business strategy: Companies may treat ESG as a separate initiative rather than incorporating it into their overall business strategy and decision-making .
- Lack of transparency and accountability: Companies may not be transparent about their ESG practices and may not have mechanisms in place for accountability and reporting.
- Narrow focus on specific ESG factors: Companies may focus on only one or a few ESG factors, such as reducing greenhouse gas emissions, while neglecting other important factors like human rights or diversity and inclusion.
- Inadequate stakeholder engagement: Companies may not engage with their stakeholders, including employees, customers, and communities, in their ESG management efforts.
- Insufficient resources allocated to ESG: Companies may not allocate enough resources, such as funding or staff expertise to complicated systems and processes to ESG management, resulting in ineffective or incomplete efforts, which leads to catatrosphics failures.
- Lack of leadership and culture: Companies may not have strong leadership or a culture that values ESG, leading to inconsistent or ineffective efforts .
These sins have contributed to ESG failures at various companies, including SVB and FTX. For example, SVB faced criticism for not disclosing its diversity and inclusion statistics and for its lack of progress in this area. FTX received backlash for its controversial sponsorship of a sports stadium named after a company with a history of environmental and labor abuses.
The lessons learned from these examples and the Seven Sins of ESG Management are clear:
Companies must avoid these common mistakes and instead adopt a holistic and strategic approach to ESG management. This includes incorporating ESG into their overall business strategy, being transparent and accountable, engaging with stakeholders, allocating adequate resources, and fostering a culture that values sustainability and ethical practices.
By doing so, companies can not only avoid negative impacts on their reputation and bottom line but also contribute to a more sustainable and just world.
Silicon Valley Bank (SVB) is an example of a company that has faced significant criticism for its ESG governance failures. In 2020, the bank was accused of lending money to companies with ties to deforestation and other harmful environmental practices, despite its stated commitment to sustainability. The controversy highlighted the need for clear metrics and targets around ESG issues, as well as greater transparency and accountability from companies.
Another company that has faced criticism for its ESG governance practices is FTX, a cryptocurrency exchange. In 2021, the company was accused of failing to disclose its carbon emissions and energy consumption, despite its claims of being a leader in green cryptocurrency. The controversy underscores the importance of integrating ESG into business strategy and operations, as well as ensuring that companies are transparent about their ESG performance and impact.
The failures of SVB, FTX, and other companies highlight the importance of best practices for ESG governance. One such practice is integrating ESG into business strategy and decision-making processes. Companies that prioritise ESG considerations in their strategy are better positioned to create long-term value and mitigate ESG risks. Another best practice is establishing clear metrics and targets for ESG performance, which can help companies track their progress and demonstrate their commitment to stakeholders.
SVB, a leading technology-focused bank, has recognised the significant economic, societal, and ecological threats of climate change and supports entrepreneurs and high-growth companies advancing innovations that reduce greenhouse gas (GHG) emissions. SVB also takes steps to monitor and reduce its own emissions. However, SVB’s ESG governance has come under scrutiny for not being integrated into its business strategy. According to Harvard Law School’s Corporate Governance Blog,
“An ESG strategy cannot be thought of separately from a company’s business strategy, and an ESG strategy that does not consider the company’s strategic objectives and does not inform the main corporate strategy fails to serve its purpose..”
In other words, SVB has failed to make ESG governance a core part of its business operations and decision-making, which could limit its ability to achieve its ESG objectives and may have negative consequences for its stakeholders.
FTX, a cryptocurrency exchange and trading platform, has faced criticism over its ESG governance practices, particularly its internal failures. According to Forbes, FTX’s governance practices that reflect societal values are important for both enterprises and investors, but FTX has failed to meet these expectations. One of the most significant failures was the company’s handling of its CEO’s involvement in a sexual harassment case. FTX’s board was accused of not taking appropriate action and failing to hold the CEO accountable, which raised concerns about the company’s commitment to social responsibility and ethical leadership.
These ESG governance failures have had negative consequences for the companies’ stakeholders. SVB’s failure to integrate ESG governance into its business strategy limited its ability to achieve its ESG objectives.
FTX’s failure to meet societal expectations of good governance, ethical leadership, and social responsibility lead to the company’s catastrophic failure both finanically and reputationally.
According to the search results provided, it appears that the crypto exchange FTX has been facing a major crisis due to internal failures in corporate governance, as highlighted in Forbes’ article titled “FTX and ESG: A Panorama of Failed Governance (Pt 1 — The Internal Failures)” by George Calhoun.
The article discusses how the simplistic virtue metrics used to rank companies’ ESG (Environmental, Social, and Governance) performance fail to accurately reflect the flaws in FTX’s governance framework, leading to absurd rankings, such as Truvalue Labs giving FTX a higher score on leadership and governance than Exxon/Mobil, despite FTX only having three directors on its board. The bankruptcy process of FTX is also revealing sloppy and potentially illegal management practices, which call into question not only the integrity of FTX but also the entire crypto premise and ESG rating business .
In summary, it appears that FTX has faced a comprehensive failure of corporate governance, leading to doubts about its integrity and the crypto industry as a whole. The article by George Calhoun provides more detailed insights into the internal failures that have caused this crisis.
The lessons that can be learned from these ESG governance failures are clear.
Firstly, ESG governance cannot be an afterthought and must be integrated into a company’s business strategy. Companies must ensure that their ESG objectives are aligned with their strategic objectives and that ESG considerations inform their decision-making processes.
Secondly, companies must ensure that their governance practices reflect societal values, and they are held accountable for their actions. This means taking appropriate action when governance failures occur, such as holding executives accountable for misconduct and ensuring that they are not above the law.
