On the London stop of the Wharton Impact Tour this June, Dean Erika James and Professor Vit Henisz, vice dean of Wharton’s new Environmental, Social and Governance (ESG) Initiative, took questions from an audience of alumni about major shifts occurring in the marketplace. Increasingly, companies are seeking skills and academic knowledge grounded in ESG factors as company valuations become more complex, taking into account operational efficiencies and intangible non-market factors. As sustainable investments hit record highs, climate change inflicts greater risks, and financing of renewable energy intensifies, Wharton is adapting its curriculum to prepare students to lead at the forefront of this emerging field. Questions were relayed to Dean James and Henisz by Sam Lundquist, Wharton’s chief advancement officer.
Here are some edited highlights from the discussion:
Question: As the School develops an ESG major and concentration for students, what does an ESG career path look like?
Prof. Henisz: Our graduates who have an ESG major or an ESG concentration, either as a single major or as a dual major with finance, with marketing, or with operations, will go traditional routes, but they will be the ESG integrators at the major consultancies, the major investment banks, the major asset managers in private equity and in venture capital.
Dean James: When I talk with students at Wharton, one of the things that they always say is, “I’m going to start my own startup connected to green energy.” So, I think there is a notion around entrepreneurship. And many more students are looking to start their own businesses connected to sustainability, clean tech, green energies, and so on.
Question: How do you quantify and assess social and government risk, and how do you square that across global regions with differing social values and governance methods?
Prof. Henisz: I come from a political and social-risk management background. And so what we’re trying to do within the Political Risk and Identity Lab, and what we’ve been doing with a grant from the Norwegian Research Council, is build up what we call the business and conflict barometer — a data science tool that mines media, social media, and unstructured texts to see what stakeholders are saying about firms to do thematic content analysis.
We know if they are complaining about human-rights issues, diversity issues, or environmental issues. We know the basis of political conflict directed at a firm and are able to show how different firms in the same place differ in the conversations that are happening and help make that be part of the political risk-management process.
Question: This question comes up in every group meeting we have with alumni, and it relates to Dean James’s surprise factor. “What surprised you the most about the Wharton School?” But this question is actually a little more specific, which is, in all the areas of research that are happening at Wharton among faculty scholarship, which one has surprised you the most, and which one did you really think business faculty were not that involved in prior to your coming to Wharton?
Dean James: What’s interesting about my tenure is the time at which I started at Wharton. It was shortly after the Business Roundtable had its latest statement on shareholder versus stakeholder responsibilities. And it was also after I moved to Philadelphia, literally a week or so after George Floyd’s murder and all of the attention around the world on matters connected to racial and social justice.
And here I am as an organizational psychologist coming to the Wharton School, which is a very quantitative, finance-focused school. I was completely unprepared for the volume of research that existed, both in the diversity space and in the space connected to this [ESG] work. And Vit is one of many faculty who are doing work in climate change and environmental, sustainability, and governance matters, and more.
So, these were the two areas that I felt were so prominent in society at that moment in time. And we didn’t have to go out and search for faculty to do that work. We didn’t have to plead with faculty to do that work. Wharton was already doing work in those two areas.
Question: There is a recognition that startups scale first and try to reach profit second, whereas other sectors in business really are about profit first. And the question is oriented around that phenomenon and how sustainability fits into each of those models: Is sustainability strategically approached differently, whether the company is in startup mode or whether it’s established and really reaching for profit? And does the School have a position on this?
Prof. Henisz: At the end of the day, both matter, right? And to the extent that, as startups are trying to advance and gain credibility through the products or services that they’re providing, there is an absolute need to prove — to make proof of concept, essentially. And that, at times, can come at the expense of profit early on with matters of sustainability.
Dean James: If there is not eventually profit, then the proof of concept is nonviable to some extent. I think the sequencing matters depending on where you are in your organization. I think that the motivation behind the question is a valid one because different companies need different things at different times.
Question: The final question is about a term that comes up a lot: greenwashing. What does it have to do with measuring the success of ESG? Is the term used differently in the U.S. and in Europe? Is this simply a matter of growing pains as ESG evolves? And what’s your solution for governing ESG from the perspective of both issuers and investors?
Prof. Henisz: That is a lot of questions! What do you have to do as an investor? Well, don’t be satisfied by an ESG label. Look deeper. Ask the questions about what they’re doing. Make them walk you through the process of ESG integration and the process by which they’re identifying value.
Look at the tracking error relative to benchmark funds. Look at the investment thesis that they’re making and be convinced. Unfortunately, that means that, working as an investor, if you want to find the long-term sustainable strategy, you have to be convinced that they’re doing this. Over time, I think in terms of how the shakeout plays out, once we start seeing more separation and a return to more money flowing into the people who are doing the hard work, I think people will become disillusioned by the people who engaged in the greenwashing.
Regulation like we’re starting to see from the FCC and from the European Union can start penalizing people who are misleading investors and are saying they’re doing something that they’re not. And I think that type of regulatory accountability is welcome, and that’ll be an important element of what the regulatory environment can provide, which is not letting everyone get away with having an ESG label when they’re not actually doing the hard work.