ESG--The People's Regulator?

Environmental and Social Governance may force different decision-making in ethical gray areas of revenue streams

Unlike Governance, Risk and Compliance (GRC), Environmental and Social Governance (ESG) prioritizes informing the public on how corporations handle their environmental and social obligations. Regulatory reporting remains a feature of ESG, but the emphasis focuses primarily on the environmental and socially ethical aspects.

With ESG, the masses now get to opine on what corporations are doing for--or to--them. Many people now look for the ESG ratings before they invest in companies. For many executives, ESG will be an important driver of management decisions going forward. Making a profit at any cost is no longer a sustainable strategy, and public opinion will now begin to drive more businesses away from the old school of profits-above-all business management.

With ESG, “we the people” takes on new meaning in corporate governance.

For years, businesses themselves could choose to operate transparently or not, and there were few checks and balances. Now, with ESG and other governing systems shining lights in previously dark corners, corporations can now expect to operate in much more transparent environments. And because of that, many mid- and upper-tier corporations will now be forced to divest from gray-area operations.

The complexity and controversial nature of ESG has been in a news a lot lately, and Tesla received lots of attention for claims of racial discrimination and poor working conditions at its plant in California. But there will also be a lot of lower-profile impacts from the growing emphasis on publicizing a range of ESG concerns. A good example lies in the power of ESG transparency to affect the proliferation of internet-based gambling and its potentially devastating impacts on the finances and health of families and individuals.

Everyone, I think, has seen the “free” games on the internet. There are all kinds, but among the most popular are the free spinning games (similar to slot machines but in digital form on one’s phone). Most of the techniques used by these companies to lure and retain users are secretive, and for good reason.

These games that are advertised as free are not truly free, of course. Rather, developers leverage human engineering to get players hooked into pay to play behaviors that cost more and more money. This transition from free play to paid play occurs slowly at first, but the cost to maintain one’s activity and enjoyment increases quickly as players get hooked. These de facto gambling companies make billions of dollars, and in so doing they become targets of acquisition by bigger companies seeking to boost their own bottom line.

But these cash cows are operating in a gray space. Some appear to be completely illegal in their tactics, and others leverage psychology to hook players into gambling behaviors—on their ever-present cell phones. In an ESG context in which social ethics matter, ever-present online gambling disguised as something different is not a good look for a company.

That is just one example. Clearly, ESG has the potential to completely level the playing field. Destructive environmental practices have garnered the most initial attention about the power of ESG, but corporations can expect its reach to include more behaviors and very soon.

As a behavioral-risk specialist, I find myself wondering whether the days are numbered for these gray-area businesses like online gaming that bills itself as free. With ESG, “we the people” takes on new meaning in corporate governance, and the desire for easy money will undoubtedly trip up some corporations