I’m a big fan of accessible research. People, rightly, get put off by a piece of work where the footnotes are longer than the main text. It is horrible to have your ability to concentrate on the ‘story’ that the researcher is trying to convey being constantly interrupted by intrusive footnotes. (The worst is when most footnotes are just references, which lulls you into not checking them, but every now and then something critical is slipped into the footnotes). Yet, as is true of many things, there is a mirror-image problem. When you want to follow the cites to the root of a statement that you aren’t sure about but can’t because you aren’t given any more information. A challenge with managerial articles is you are often left on your own trying to work out whether the paper is a) correct and you are misunderstanding it, or b) the authors are completely wrong, or c) it just contains a typo.
ESG And Financial Performance
The article I am discussing today is in (likely) the most influential of managerial venues, the Harvard Business Review (HBR). Back in the fall of 2022 HBR published an article on ESG and financial performance. This is an important and controversial topic and so it makes sense to share knowledgeable people’s thoughts on it.
There is a lot of work already on making sustainability commercially successful but I would say nothing is definitive. Part of the challenge is many people really want to know whether better/responsible/sustainable business can be more profitable and yet ESG measures are far from perfect at identifying these businesses. (This isn’t a criticism, ESG reports are a new form of reporting and things take time to improve). There are challenges determining if ESG measures really signify better business. As the authors say, Exxon Mobile does well on some ESG measures which does seem, to say the least, very generous. It doesn’t give sufficient confidence that high ESG signifies a better form of business.
Yet, other people might have different concerns. Some investors maybe don’t care about better business. They just want to know if ESG measures predict success as they would like to know about anything that predicts success. It isn’t the ESG that matters, per se, only what you can deduce about the future from the metrics. If ESG measures picked all the worst firms for the world but the ESG measures predicted future profitability the measures would work perfectly for these people. Furthermore, when discussing prediction of the future of financial markets you then get into lots of discussions of how markets react to information which is tough, and it is even worse when you are thinking about how reactions change over time. I’m not going to try that today.
Advice On Management Of ESG Issues
The authors focus on ESG but they give some sensible advice that works for running a sustainable business, the headings are listed below. This advice won’t always be easy to achieve but certainly worth trying.
- Identify The ESG Issues Material To You Company
- Focus on Strategy, Not Reporting
- Optimize The Impact Intensity Of Profits
- Collaborate To Avoid Trade-Offs Between Profit And Social Benefit
- Resign Organization Roles
- Bring Investors Along
Apple Watches Are The Secret To A Long Life
Where the authors lost me was a bit of a claim about Discovery, “a global life and health insurance company”. Apparently, Discovery have a program to encourage healthy behavior including giving out Apple watches.
Rigorous academic studies by RAND, Johns Hopkins, and others have shown that the medical costs of Discovery’s health insurance subscribers are 15% lower compared with those insured by local competitors, and life expectancy of Discovery’s life insurance customers is 10 years longer. [My emphasis]
Kramer and Pfitzer, 2022
That last comment is truly incredible. In the sense of ‘incredible’ that implies I absolutely don’t believe it. Do they mean to imply that a health insurer can add ten years to your life by giving you a free Apple Watch? If the company gave out iPads too, would they deliver the secret to eternal life? Ten years added to life expectancy is just too big an effect for me to believe it could be caused by the actions of this insurer.
To be fair, I can believe that the finding might be a result of selection bias. I.e., healthier people are more likely to have Discovery as their insurer. Still, that doesn’t seem to me to be the claim that the authors were making, or, if they were making it, it isn’t a very interesting claim. After all, if Discovery business model is to only insure healthy people, this doesn’t seem to be in the spirit of sustainability. Surely the authors can’t mean Discovery is good at picking healthier customers. They must mean being a Discovery customer adds 10 years to your life or else who cares about the claim?
Ten Years, It Is A Long Time
Adding ten years to an expected lifespan is an astonishing claim. This difference is the rough equivalent of being born in the United States versus being born in Gabon. Maybe I’m wrong (I can’t check the absent citation) but can we really bring the people of Gabon up to US life expectancy with an Apple Watch and a couple of healthy eating classes? It sounds pretty unlikely to me.
The casualness of the claim reminded me of the work on Drunk Tank Pink, see here. A color that in experiments was argued to reduce dangerous people’s violent tendencies. The claim seemed a bit too good to be true. If true, why aren’t we painting everything this miracle color? The author of the work on Drunk Tank Pink seemed to lack intellectual curiosity about what the world could look like if the claim was true. Instead, the claim was made but no serious thought to the meaning of the claim for society was given.
A Challenge With Managerial Articles
This leads to a challenge with managerial articles. I like them, and don’t like academic snootiness that suggests that publishing in an academic venue is only for those going out to intellectual pasture. Academics should do more of them. Yet, managerial articles have a big problem in that when they don’t footnote you can’t really dig into claims. I want to know more about these studies from RAND and Johns Hopkins that support the authors’ claim. Sadly, I don’t know what the evidence is and couldn’t find anything with a Google search.
Without footnotes, the reader is relying on the expertise of the authors, the credibility borrowed from Johns Hopkins etc…, and reputation of the publication venue. This is often not a bad heuristic. Still, top authors do make mistakes. Even the best report from the most careful researchers can be misunderstood or misquoted. Careful editors at prestigious publications still let mistakes and, occasionally, total nonsense slip through. Without footnotes the reader is left with little way to drill down further. You either believe the claim or you do not. In this case, I don’t.
Still, I’d love to be wrong. Maybe Discovery health insurance have a way to get us to live ten years longer that is cheaper than current health practice. If so, it seems a bit selfish of them not to share their miracle more widely than a throwaway comment in a HBR article. For such selfishness I’d mark down their sustainability — not sure what the impact would be on their ESG scores.
I do worry that citations can spoil the enjoyment of reading a text but sometimes you really need them.
For more on sustainability see here.
Read: Mark R. Kramer and Marc W. Pfitzer (2022) “The essential link between ESG targets & financial performance.” Harvard Business. Review, 100: 128-137.