Morality is a strong word in ESG thinking. After all, ESG means considering long term effects, those that will concern our children, rather than ourselves. It wants companies to take all stakeholders’ interests in account, rather than just those of the directors and perhaps the shareholders. Companies abusing the environment may not be operating against the law, but they are still acting immorally. Companies abusing their employees may be legally right, but they are morally wrong; think of some big retailers and their attitude towards trade unions and workers’ rights. Companies making products for killing and products that are unhealthy can claim that there is demand for their product, but that doesn’t necessarily mean that the demand must be met. If acting in accordance with ESG thinking means acting morally, there is a class of practices that seems forgotten in mainstream ESG thinking: customer abuse. Taking a step back, morality is a function of culture and therefore means different things in different places and eras. Nevertheless, even if we don’t agree on the border of what is moral, we agree on the nucleus. Immoral is what makes us mentally uncomfortable. Let’s consider an example. A book club organised lotteries. All “prospect” addresses on the mailing list received a colourful circular letter, the envelope addressed with a font that resembled handwriting, the letter starting with the first name on the envelope and signed with a printed signature. The company wanted the addressee to think that the circular letter was to them personally. The letter included a lottery ticket, sometimes paper, sometimes a medal. Participation in the lottery was without obligation to become a member of the book club or take out a subscription. A large consumer organisation asked its members to come forward if anyone had a lottery ticket with a number different from the handful that they had found. Sure enough, the winners could not be traced and neither could the winning numbers.
Or another. A mail seller of underwear sent overpriced articles to “prospects” without order or consent with aletter explaining that the articles could be returned – at the cost of the sender, within a short time and in the original packaging. Those who did not respect the unilateral rules of the sellers were deemed to have bought the articles and quite a few who sent the articles back unregistered found out that their return shipment had “disappeared”. The seller used a very aggressive dunning company to collect “debt”.
The web is also a boon for malpractice. A large Internet auctioneer is known to be a haven for thieves, fraudsters and dealers in stolen goods. Almost 100% of Chinese coins offered from China are fakes. Greek and Roman coins that are blatant copies in the wrong metal are offered as “family heirlooms” that were in the family for generations. Cheap Indian coins miraculously become expensive Celtic coins. Modern copies that can easily be turned into something like the real thing, e.g. by silvering are offered in bulk as an invitation for fraud. The company has a complaint procedure, with tight deadlines, so tight that international mail alone can defeat them. It has also stacked the deck against buyers. Complaints of third parties are stonewalled or completely ignored. Fraudsters can open a new account and carry on as if nothing happened if they ever lose their account after complaints.
ESG is a risk-control instrument for investors. Companies that do not take their ESG responsibilities seriously are considered to be a larger risk, in particular in the long term. The client abusers are in the same position. In the long run, they are in danger of running afoul of the law, new regulation, pressure groups, image risk and viral Internet scandals. Moreover, in a tight labour market, they may well find that the best minds prefer more ESG oriented companies.
Many of the customer abusing companies are US-based. This is no coincidence. Consumer protection in the US is on a low level, compared to European countries. An approach of caveat emptor (let the buyer beware) has led to a litigious culture, again compared to
European countries. However, litigation is risky and costly, so it doesn’t work as comprehensively as regulation. Does that mean US companies have a free ride? Not so. In general, multinational companies need to take other approaches to morality into account. As Apple found out, what is acceptable and legal in Ireland, may be considered immoral in the US. Even US companies that buy in other countries are at risk, whether they buy clothes made with child labour or use ships from Polish wharves using North Korean slave labour.Does ESG cover customer abuse? It should, but it is hard to think of a case where a company was singled out for customer abuse. And yet, the book club is now marginalised and slowly disappearing, the underwear sellers are driven off the market and the internet auctioneer faces competition from auction houses that do find forgery and dealing in stolen goods more important than their short term profit.
Peter Kraneveld is an International pension expert at PRIME bv. He is a former chief economist at PGGM.