[Viewpoint] Making This World Sustainable

Why ESG Is Becoming the New Standard for Corporate Management
Three Reasons Why Companies Must Embrace ESG for Sustainable Capitalism

The world is caught up in the ESG (Environmental, Social, and Governance) craze. Earlier this year at the Davos Forum, 61 global companies declared their intention to adopt the ‘Stakeholder Capitalism Metrics’ in their management, and Larry Fink, CEO of BlackRock, a major player in the investment industry, began actively promoting this, sparking a global surge of interest in ESG management. Many wonder whether the ESG craze will end as a short-lived trend or establish itself as the new standard of evolved capitalism. Let’s examine three reasons why ESG is becoming a new standard in corporate activities.

First, the European Union (EU) and the United States, who have maintained capitalist hegemony for centuries, are now facing a formidable rival in China and its model of Chinese-style capitalism. If competition is based solely on financial performance and evaluation factors, they are bound to lose to China. The need to change the rules of the game has grown. The EU, as a leader in ‘sustainability,’ is raising entry barriers to its market by strengthening ESG. The UK, France, Germany, and the Netherlands plan to enforce enhanced non-financial disclosure and supply chain due diligence laws in 2024. The EU has enacted the ‘Energy Transition Law,’ requiring listed companies, banks, and investment institutions to disclose climate change-related financial risks in their annual reports. In the US, the Securities and Exchange Commission’s (SEC) ‘ESG Disclosure and Simplification Act’ passed the House this year. Anglo-American capitalist countries want to maintain their hegemony by restructuring global supply chains. For this, a new standard and norm called ‘non-financial performance’ is necessary. This reflects a political intent to check China and maintain a ‘super-gap’ with developing and emerging countries.

Second, as the Fourth Industrial Revolution, where platform companies and data become money, is in full swing, the boundaries between market and non-market are collapsing. This boundary breakdown, called Big Blur, also blurs the distinction between for-profit companies and non-profit organizations. In the past, for-profit companies only needed to maintain financial performance. Now, they must consider so-called non-market factors such as environmental activists, the media, citizens, and governments, entering an era of infinite responsible management. A Capitalism 4.0 system is emerging where companies must pay attention to ESG components, i.e., non-financial performance, beyond financial results. Walmart, the world’s largest offline retailer, is a representative example successfully responding to the Fourth Industrial Revolution. Walmart’s recent slogan is ‘Opportunity is only with us.’ Walmart’s non-market strategy, which views sustainability as a huge opportunity, serves as a valuable lesson. It offers hope that ESG management can, in turn, improve financial performance.

Third, over the past few generations, issues such as income polarization and equity problems caused by capital returns exceeding labor returns have reached levels beyond limits, posing challenges to capitalism today. It has become time for companies, not governments or civic groups, to solve these problems. In the ESG era, companies have the mission to simultaneously achieve four goals: financial performance, customer satisfaction, internal processes, and learning and growth. If companies practice ESG management, they can maintain balance and harmony across performance indicators from these four perspectives. In short, ESG can be interpreted as ‘making this world sustainable.’ The era has come when companies must take the lead to achieve sustainable capitalism.

This content was produced with the assistance of AI translation services.