ESG is Sparking a Political Backlash – Don’t Let It!
ESG in the corporate sector has a long and apolitical history. It was conceived as a way to highlight risks and opportunities from social, environmental and governance actions that might traditionally fly under the radar of business decision-making. Its success as a strategic tool is clear from its rapid adoption in the roughly 20 years since its inception. The 2020 KPMG Survey of Sustainability Reporting revealed that among the top 100 companies in each of 49 countries they examined, sustainability reporting has increased from 18% in 2002 to 80% in 2020.
The idea of ESG metrics as important business tools has been touted by a growing number of industry leaders. In 2019, the Business Roundtable released a new Statement on the Purpose of a Corporation, signed by 180 CEOs, stating they share a commitment to all stakeholders, including customers, employees, suppliers and communities – as well as shareholders. “By taking a broader, more complete view of corporate purpose, boards can focus on creating long-term value, better serving everyone – investors, employees, communities, suppliers and customers,” said Bill McNabb, former CEO of Vanguard.
Building on this idea, BlackRock’s Larry Fink famously used his annual letter the following year to press companies to engage in “stakeholder capitalism,” and specifically to focus on sustainability “not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients.”
Responding to this groundswell and the growing understanding of the impact of climate change, the U.S. Securities and Exchange Commission (SEC) proposed new rules in March of this year that would require public companies to disclose their climate-related risks, emissions and plans to transition to net-zero.
Suddenly, some factions no longer view ESG work as apolitical.
In our highly polarized environment, a world in which, according to a Pew Research poll last year, only 10 percent of Republicans and right-leaning independents called climate change a top concern, compared with 49 percent of Democrats and left-leaning independents, the spotlight shined on ESG by Larry Fink and the SEC has angered some who now see ESG reporting as promoting a political agenda:
WV Treasurer Riley Moore, announced in January, 2022 that his state would no longer use BlackRock to manage its operating funds, said “If you don’t want to do business with our industries, we are not going to do business with you.”
Elon Musk, in a fit of pique after his company Tesla was removed from the S&P500 ESG Index in May, tweeted “ESG is a scam. It has been weaponized by phony social justice warriors.”
Former Vice President Mike Pence delivered a speech in Houston in May referring to “capricious new ESG regulations that allow left-wing radicals to destroy American energy producers from within.”
Republican senators in Congress have introduced a bill calling for large investment companies, such as BlackRock, not to be able to vote their proxy shares at shareholder meetings.
In light of this backlash, we’d like to remind readers of the powerful and persuasive business rationale for forging ahead with ESG work.
ESG metrics have been heralded for enhancing transparency, efficiency and access to capital and for responding to the growing demands from stakeholders, such as customers and employees, who want to understand a company’s impacts on the world. Some of the benefits are described in the box to the right.
Let’s also recall the numerous studies that have shown that companies that take ESG improvements seriously demonstrate superior returns and greater resilience to economic shocks, such as the economic downturn during the COVID pandemic. An example of this correlation is shown in the figure below, in which the 31 US members World Business Council for Sustainable Development (WBCSD) outperformed the S&P 500 Index for the first 10 months of 2020 (when the study concluded). Similar results were found among WBCSD members in Europe and Asia.
Our clients’ direct experience of the benefits of ESG work corroborate these findings. The following quotes are taken from stakeholder interviews we have conducted for clients in the past year.
To conclude, gone are the days when companies had to decide between making money and acting responsibly. The overwhelming consensus from business leaders, academic studies and ESG practitioners is that you can do both, and that responsible corporate actions can help achieve better financial returns. In fact, we ignore the importance of this work at our peril. In a globally competitive marketplace where other regions of the world continue to push ESG to the forefront, tying the hands of our investment entities and U.S. businesses so they are unable to reduce their exposure to the risks of climate change or other ESG issues threatens our country’s economic security. Indeed, even the military now regards climate change as one of the top threats to American national security. So let’s resist the temptation of mingling ESG with ideology and instead continue to foster the use of ESG as a pathway to financial success. It’s a classic win-win!