A few weeks ago, I presented to a financial services firm based in the EU, and they asked me a fascinating question.
Do you think the anti-ESG pushback in the US will have an influence globally?
While I am asked similar questions from US companies who are worried enough to enter a thoughtful discussion, this was the first time I heard concern about the uniquely American phenomenon of conservative misinformation from a foreign player. It caught me entirely off guard.
I can’t share my answer here because that was weeks ago. Still, recent events have me thinking about that meeting again, how the anti-ESG efforts are making headway, and where it is hitting the harsh realities of conservative values.
First, let me be clear. I’ve only heard of one company, Vanguard, back a little away from ESG. You can read the CEO’s comments here. Some companies are strategically scaling back some ESG efforts due to challenging economic conditions (in case you saw the misguided #GoWokeGoBroke trend on Twitter this week). Still, those that have started ESG efforts largely have not stopped.
Second, while Republicans are in lockstep on the ‘boogeyman’ nature of ESG and passing legislation accordingly, the most vocal conservative presidential candidates drive the anti-ESG narrative. This is evident as the author of Woke, Inc. is now in the running. On the surface, they appeal to voters worried about progressive values but ultimately cost their constituents money. While a disturbing realization, I worry that the seeds of doubt are spreading due to a false narrative.
As the WSJ Editorial Board retires, they might lose money
America is a crazy mix of political views that can shift every two years. This means that making lasting progress, like shifts needed to address climate change or social justice issues, is increasingly difficult as the political landscape moves dramatically toward the fringes.
ESG finds itself in this push-pull. In 2020, the US Department of Labor ruled that investors couldn’t select ESG funds for retirement because they were not pecuniary. As the governing body ensuring worker investments lead with fiduciary responsibility, they effectively shut the door due to the narrative.
In November 2022, the Biden administration rolled that rule back. The US Senate is sending Biden a bill to keep ESG investing out of retirement plans. Biden is expected to use his first veto here. Back and forth we go.
This past week, Chuck Schumer (D) argued that Republicans Ought to Be All for ESG in the WSJ, with the WSJ Editorial Board making a counterargument. What’s incredible is that the politician makes the fiduciary argument while the WSJ makes the political one in a defensive posture.
Per Schumer:
This isn’t about ideological preference. Investors and asset managers increasingly recognize that maximizing returns requires looking at the full range of risks to any investment—including the financial risks presented by increasingly volatile natural disasters, aging populations and other threats that the public doesn’t normally associate with financial modeling.
Meanwhile, the WSJ Editorial Board inadvertently showed its ignorance (and apparent support) of ESG’s material impact by repeating conservative talking points:
The Biden rule reversed a Trump-era clarification of the 1974 Employee Retirement Income Security Act (Erisa), which required retirement plan fiduciaries to consider solely “pecuniary” factors that have a “material effect” on investment risk or return.
Schumer and the WSJ believe that material factors should play a role in retirement plans and investment strategies, but only Schumer understands how ESG is material. So here we are again with the two definitions of ESG: value and values. Schumer favors the actual definition, stretching back to the UN Global Compact’s definition from 2004 in Who Cares Wins. This one grounds us in the reality of ESG risk and opportunities and away from politics:
This report focuses on issues which have or could have a material impact on investment value.
So, if we take this original definition of ESG, the WSJ Editorial Board is incorrect. Further evidence is found in Alex Edmans’ research on The End of ESG, which argues that ESG could end because it protects and chases long-term value, which companies, their boards, and investors already do.
By aligning with the political viewpoint of one party on a non-political issue, the WSJ Editorial Board is aligning with conservative political values. In my opinion, the anti-ESG narrative aims to get politicians elected. Sure, there are challenges in this space, like high fees and a lack of clarity, but that falls to financial services firms to clarify and separate from ESG issues that companies must address.
It is important to note that sometimes what appears to be progressive values can enter the ESG narrative. For example, a manufacturer might have a low-carbon goal (non-material), but turn it into a material advantage through a circular economy approach to their products (material). A hospital might hire diverse staff (non-material) from the community it supports to meet local needs (material). These thoughtful decisions simply make good business sense.
Just because some say ESG is political does not make it so
And so ESG isn’t about progressive values and is not a political movement. As result, reason is starting to take over the narrative. Liberal politicians will sometimes be the voice of reason. This is unfortunate as their defensive stance can make ESG appear a political issue.
NYC Controller, Brad Lander, talked about the anti-ESG Senate bill on CNBC this week. What I enjoyed about his interview where the two great examples he used: insider trading concerns (G) and Starbucks’ anti-union practices (S, G). The first can harm pensioners’ returns, and the latter led to a National Labor Relations Board judge ruling against Starbucks for ‘egregious and widespread misconduct.’ Both of these are material examples.
Outside of the anti-ESG narrative, some conservatives show concerns that the movement is countering their values. Remember, this is the party of limited government telling investors and companies how to operate.
The Washington Post has an excellent read on how traditional conservative values are starting to scratch around the edges of the anti-ESG movement. In The conservative battle against ‘woke’ banks is backfiring, they report:
In North Dakota a pair of proposed laws went to crushing defeats with one losing by a 90-3 margin on Feb. 1. They were shot down, in part, by arguments that these proposals contradicted conservative principles.
North Dakota isn’t alone, as WP reports that “Republican strongholds such as North Dakota, Indiana, Mississippi, and Kentucky” have struck down or chipped away at anti-ESG laws. Conservatives, who long believed government overreach could be a risk in companies' operations, seem to be coming around to reason. Of course, they aren’t alone. This is where things get interesting.
Some financial services firms have added the risk of anti-ESG in their 10Ks, calling it a material issue. I recommend following Andrew Droste (aka. Mr. CorpGov) on Twitter, as he’s been tracking these a bit, and they are well worth the read.
For example, in its 10K above (page 56), KKR calls out the anti-ESG sentiment, its intersection with specific stakeholders, and the inability to address ESG-related expectations for other stakeholders as it ties directly to risk:
If we do not successfully manage ESG-related expectations across these varied stakeholder interests, it could erode stakeholder trust, impact our reputation, and constrain our investment opportunities. In addition, investors may decide not to commit capital to future fundraises as a result of their assessment of our approach to, and consideration of, ESG matters.
That sure sounds like the anti-ESG movement has become a Governance tightrope that companies now have to walk.
In politics, the story you tell leads you to become the thing you hate
And so, we’ve seen conservatives push against their core values, such as limited government and divestment, in pursuit of political ambition. In doing so, the anti-ESG movement has become a Governance issue that will remain until the narrative shifts toward reality.
So, back to the question at the start. Here’s my take.
Even if anti-ESG politicians are elected, and ESG is kept out of retirement plans, the train has left the station, electronically controlled pneumatic brakes and all. You can’t stop ESG with rhetoric since investors and companies will always chase long-term risk in some form.
Even some Republican governors understand how to capitalize on an ESG risk. In Oklahoma’s push to become the next Texas, Republican Governor Kevin Stitt “boasted in a recent interview about not only the state’s “affordable, reliable energy grid” but his effort to do away with 25 percent of the state’s regulations on businesses.”
Stitt has effectively turned Texas’s ESG risks into his state’s opportunity.
So, will ESG impact the global perspective? In my opinion, there is no chance. The world’s companies will mitigate ESG risks while creating new opportunities. Meanwhile, you will hear a common refrain of misunderstanding from boards and conservatives:
ESG takes up too much time.
Here are all the great examples where we are driving long-term value.
If you listen closely, those examples are ESG!
So here’s the reality:
The world won’t wait to see if American politicians restrict ESG.
It will already have moved on.