Break the chain

The politicization of ESG continues and must break before it is mainstreamed

With a self-proclaimed title like “The ESG Advocate” and having just published a book on the topic, I speak often and enjoy doing it. There’s nothing like when you are talking, someone asks you a question, and you can tell that you’ve made them think. This feeling is what almost drove me to be an English professor.

Alas!

This past week, I received an interesting note from someone about an upcoming speaking opportunity around sustainability and ESG.

The note I received stated that the term “ESG” has become political and recommended a shift towards concrete risks and opportunities.

This is the first time I’ve been asked to withdraw from the acronym due to its political nature. I typically lean toward the political discussion and attempt to de-politicize ESG because it simply isn’t a political idea.

Granted, the winds of change are blowing, especially with younger generations, but a business focus on saving the world isn’t necessarily ESG. Those activities might be more linked to impact or environmental sustainability.

When discussing ESG, I lead with the original intent: to address material risks and opportunities in pursuit of long-term growth and resilience. No ‘shift’ should be needed in any discussion because regardless of whether a company uses the acronym, it cannot avoid these issues. This was the theme of The ESG Advocate's 2024 Letter to CEOs in January 2024.

These issues are not political just because someone claims they are. That’s when it hit me: When someone engages and acknowledges the political nature, it only perpetuates the problem.

While I don’t need to talk about the term “ESG” to talk about the concepts behind them, I warned about pulling away from the acronym too early at the very end of ESG Mindset:

If ESG is poorly understood or incompletely mainstreamed, employees lose the ability to understand shifting stakeholder preferences that can inform the creation of new opportunities to capitalize on these changes.

In other words, not using a simple term like “ESG” puts people in the opposite mindset and can cause siloed or disconnected perspectives, placing a company at a disadvantage. The seemingly simple belief that ESG is a political concept does this. Actively fighting against ESG by adding a ‘right’ or ‘left’ attribution creates a convenient boogeyman at the expense of risk mitigation and opportunity creation.

…and when politicians figure out that ‘sustainable’ and ‘energy transition,’ which are terms that the markets now favor, are just window dressing for ESG, the chain will be pulled, and the engine will start up anew.

So, how do we talk about ESG and politics without getting ‘political?’ Well, let’s take a look at the latest and see what we come up with.

The Anti-ESG state push continues

Yes, the unfortunate and unnecessary politicization of ESG continues. Instead of seeing ESG as a lever to ensure a company's long-term resilience by managing ESG issues that affect it, anti-ESG politicians align it elsewhere, blaming institutional investors and banks for pushing a particular set of values.

In this case, ESG is shorthand for boycotting energy companies or engaging in the energy transition. For example, Texas’s State Bill 13 (SB13) is titled: Relating to state contracts with and investments in certain companies that boycott energy companies. The bill does not mention ESG, but transitional activities, like “action, inaction, decision, divestment, investment” are included.

ESG is not about pushing values, although it is often confused with impact and SRI investing, which may engage in these types of activities. It is about making quality, material decisions based on a complete set of information in pursuit of long-term growth. Something like the phrase ‘energy transition’—well, that opens up for even broader interpretations and depends on intent. Is the investor or stakeholder engaging in activism, trying to help the company be resilient long-term, or a little of both?

This past week, the rhetoric increased as Indiana Secretary of State Diego Morales sent a letter to BlackRock claiming fraud regarding its “false and misleading statements” about ESG. This is well outside of what conservative politicians have focused on regarding the energy transition but builds on the rhetoric from the infamous 2022 letter from state Attorney Generals to Larry Fink.

While Morales offers no evidence for his claim, BlackRock communicates its ESG integration position in public information:

At BlackRock we define ESG integration to be the practice of incorporating financially material E, S and/or G data or information into our firmwide processes with the objective of enhancing risk-adjusted returns of our clients’ portfolios.

For BlackRock, it comes down to financial materiality.

If you remember, Indiana passed HB1008, an anti-ESG law that initially would have initially cost state pensioners $6.7B over ten years and possibly now only will cost them $5.5M.

The linked article’s title is a prescient warning, “Anti-ESG bill passes Indiana House with fewer losses expected for state pensioners.” Losses are expected, and those losses may grow if these political antics continue.

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The Anti-Anti ESG push continues

Yet, not everyone is in lockstep on the anti-ESG push. Some find a middle ground in the noise, while others fight back.

No Republicans voted for the US Inflation Reduction Act (IRA), which covers investments in climate change and energy transition issues to social issues, like lowering and controlling the cost of prescription drugs. Despite this initial lack of conservative support, 18 congressional Republican leaders recently sent a letter to House Speaker Mike Johnson to spare the energy credits at least. One of the signatories is Indiana Congresswoman Erin Houchin.

Indiana is taking advantage of the IRA through a new program through its Office of Economic Development (OED), which they have named the Indiana Energy Savers program. The US Department of Energy just announced support for these rebates for homeowners, and the state appears to be gearing up for a rollout in early 2025.

Many states are signing up for these rebates. According to Indiana, its programs aim to incentivize energy savings, even supporting potentially marginalized stakeholders, which one could consider the “equity” part of DEI. One section calls this out explicitly:

The Home Appliance Rebate program is exclusively for low- and moderate-income households (less than 150% Area Median Income) to purchase high-efficiency equipment.

If this isn’t an ESG program focused on the energy transition and lowering costs for stakeholders, I don’t know what is.

In addition to this direct program, funding is available for the energy transition at the project level through the Empowering Rural America (New ERA) program. According to the USDA’s website, this funding “helps rural Americans transition to clean, affordable, and reliable energy” through investment in rural electric cooperatives. Until the window closed for applications last September, $2.4B of total IRA funding was requested from Indiana, including $1.8B for the New ERA program, specifically across 29 projects.

Between citizen and rural energy cooperative investments at this scale, it is no wonder politicians are hesitant to roll back the IRA and lose these energy credits, even in anti-ESG states.

While some politicians are coming around to these investments, some citizens are fighting back. A retiree in Oklahoma launched a lawsuit against the state’s anti-ESG law and convinced a judge to block it this spring. Texas appears to be the next state facing legal challenges.

As we’ve seen above, Texas has been one of the key players in the anti-ESG movement, pushing it much farther than others, including the tracking of an ongoing ‘blacklist’ of banks, which is outlined in SB13. That list is up to 15 non-US banks (including the newly added NatWest) and BlackRock.

Fossil fuels are a material export of Texas, and this is a point that cannot be overlooked.

Per the EIA, Texas accounts “for 43% of the nation's crude oil production and 27% of its natural gas gross withdrawals.” Even if ESG doesn’t mean an immediate divestment from fossil fuels, a responsible energy transition without energy companies building realistic transition plans represents a massive economic risk.

The IRA funding requests out of Texas provide a reality check. Texas has submitted $2.2B of funding proposals for the New ERA program across 42 projects. Whether or not state-level politicians would disrupt any approved funding remains to be seen. I doubt any investment would be blocked since the state’s comptroller is also gearing up similar direct energy credit programs like Indiana.

Still, there is a lot of unpredictability. Unlike Indiana’s legislature, where the state doesn’t have direct fossil fuel in its top ten exports (although there are some related industries), a clean energy transition is a material issue for Texas.

Whether the state actively fights ESG in one area while taking subsidies for home efficiency or rural electrification in another may not be the point here, as a new lawsuit has been launched calling the state’s anti-ESG bill (SB13) unconstitutional.

Per a Bloomberg article, lawyers for a retiree in the state claim:

It impermissibly infringes rights of free speech and association under a scheme of politicized viewpoint discrimination, based on no legitimate state interest.

Eh, I heart this lawsuit, but I’m not sure there is no legitimate state interest here, as I’ve stated. I believe there is a difference in the short-term interest (investment in fossil fuels) vs. the long-term interest (a responsible energy transition), which could be argued.

The lawyers correctly claim that SB13 hurts businesses. After all, similar to Indiana’s efforts, SB13 is estimated to cost the state money (upwards of $700M). Of interest, SB13 has one provision that appears to be a cautious reminder of fiduciary duty.

Except as provided by Subsection (a), a state governmental entity may delay the schedule for divestment under that subsection only to the extent that the state governmental entity determines, in the state governmental entity's good faith judgment, and consistent with the entity's fiduciary duty, that divestment from listed financial companies will likely result in a loss in value or a benchmark deviation described by Section 809.056(a).

This litigation might target investor choice through free speech against a seemingly arbitrary assessment of banks’ actions, but it does not appear to ask the more pressing question of how Texas can justify the losses incurred through increased capital costs to citizens and communities.

Depoliticizing ESG

So, the chain pulls, and the engine continues to roar—and it likely will for a while. Still, we can write about politics without becoming polarized.

For my part, I will continue to advocate for an ESG mindset regardless of the political winds because companies must be prepared for the new world in which they operate. ESG is not a political issue, and when companies put it in that position, their dismissal results in the loss of a critical perspective.

The path to defensibility for any company lies in focusing on material risks and opportunities.

I have been asked on plenty of panels, including at GreenFin, about the politicization of ESG. On those panels, I addressed the topic in a balanced way, as I have here. In this upcoming event, I will also address the topic focused on risks and opportunities because that is what ESG is.

After all, the sooner companies realize that ESG protects value, the faster they can build long-term resilience. And there are only so many times this chain can be pulled until it breaks.