Come into my office and have a seat

It's understandable to feel the way you do

It is tough to be an ESG Advocate at the moment. Frankly, if you intersect with any ESG topic, the news lately continually beats down our ambition. I look around at the corporate and financial news and wonder what is happening and where the field is going.

My father recently texted me to question my career pivot, asking me to hedge my journey. If you feel that progress is suddenly impossible and find yourself questioning the work, come into my office and have a seat.

Why it matters: Progress is possible, and the foundations for driving meaningful change are being laid.

I’ll admit that after the US election, I thought that company leaders reaching out to the incoming administration was a smart move to hedge against uncertainty and a way to stay in control. Still, what we’ve seen out of CEOs lately has been a mind-boggling alignment to a political movement, including trips, donations to the inaugural fund, and entire company policy and culture shifts (unfortunately, I’m looking at you, Meta).

The general leadership consensus is focused on hedging these political bets and deprioritizing employee sentiment.

Yes, after seeing a rise in unionization over the past few years, the power is now shifting away from employees back to the company as a ‘stable’ job market forms. Today, the slightest reputational risk from a political breeze can tip company leaders into changing policies because employees are less likely to walk away as they have fewer options.
NOTE: This doesn’t make the concerns of the employee stakeholders immaterial.

With these significant headwinds, companies react in various ways and make the headlines.

The headlines that ruin our days

Headlines for every business issue have become a continual stream of ‘the sky is falling,’ with little details that empower anyone to be an armchair expert. As a result, the level to which companies are improving their ESG strategies around the reworking is missing from the narrative. The result is a pile of lazy headlines that push our morale further into the ground.

Consider the headlines about corporate donations (usually $1M) to Trump’s inaugural fund. Every company seems to be doing it, but the cost of two white-collar workers plus benefits is a small price to pay to curry political favor. Remember that companies have historically given to past presidential funds like this.

Yet, reading about the pullback of ESG programs is something else entirely. This past week, we saw McDonald’s join the corporate trend around DEI, and both JP Morgan Chase and BlackRock pulled out of net-zero alliances.

The WSJ summarized much of the recent years’ machinations in an article titled The CEOs Who Are Tearing Up the Policies Trump Hates, which is the worst ‘WSJ Wrapped’ ever for those already stressed. This recap included well-known challenges, like those at Disney in its fight with Florida Governor Ron DeSantis. They also cover the recent round of firms pulling out from net-zero alliances and named JPMorgan Chase, Morgan Stanley, Citigroup, Bank of America, Wells Fargo, Goldman Sachs, and BlackRock. The article wraps with one-off visits from Pfizer’s management team to Mar-a-Lago to a streaming services battle over the rights to distribute a documentary based on Melania Trump’s book.

These headlines and corporate signals, along with the potential that Trump will pull out of the Paris Accords again and gut key investments from the IRA, beg the question of how ESG professionals can go on.

Alright, stay with me. Maybe you should lie down, grab a Sustainability Forestry Initiative-certified paper bag, and take some deep breaths.

Keep it material to maintain the momentum

Companies play a role in the long-term transition, and many seek systemic change, but businesses do not exist to save the world and its people. Not every company is Patagonia or a mission-locked B Corp, and even they have to make money to meet their purpose.

Each company has a unique intersection with ESG topics that may or may not drive systemic approaches forward, but it has to be material. Only from that vantage can the company deliver impact if it chooses. After all, with immaterial efforts, as soon as underperformance creeps in, these programs are the first thing to go or be reworked.

We saw this in a headline about Unilever’s shift: Unilever sustainability refocus amid underperformance.

On the other hand, a company that performs well and understands the material intersection of ESG topics with the business, as we saw last week with Costco and its DEI efforts, can continue defending those programs.

Key point: Materiality and stakeholder considerations build defensibility.

Making immaterial claims like ‘we are pursuing net zero’ may no longer be tenable in today’s political environment as carbon isn’t universally material.

Capitalizing on the ESG opportunity or addressing risks will always be defensible.

That means well-run banks should focus on equitable lending, financing the energy transition, and considering climate risk. Retailers should pay attention to sustainable product trends, and food and beverage companies should monitor health trends and offer new products. Manufacturers should drive efficiencies and source sustainable materials. Healthcare companies should consider how diseases evolve in a 1.5-degree future.

Broad claims and goals are now open to attack, but material work isn’t. This is one reason companies restate their goals (although there are at least two others). As they hit material decarbonization, they are starting to get it.

Yes, the work continues if you know where to look

So, here is why I’m not despairing quite yet.

Companies are slowly learning the lesson about material ESG efforts, which appears to be a new trend. The companies making headlines lately say that they are still committed, and you know what? I believe many of them because I know where to look.

Buried in most of the DEI pullbacks, you’ll find that companies are still committed to diversity in an admittedly throwaway line meant to protect the value of diverse talent and stakeholders. Above, I mention McDonald’s and intentionally provided a link to a really unfair take (from the AP) on the story, where they do what all media outlets do. They bury the useful lede at the end piled under a mountain of other recent pullbacks to make you think every company is consistently shutting down their programs.

That’s not the case, so let’s go to the source. Suheily Natal Davis, VP of Global Inclusion at McDonald’s, posted the letter that was sent out, inviting her connections to ‘read past the headlines.’ I couldn’t be happier that she did.

The company is retooling its efforts and remains committed. The letter outlines McDonald’s four guiding principles, reminiscent of those in Costco's code of ethics.

(1) Our system thrives when we are shaped by the communities in which we operate, (2) Our early and full adoption of inclusion gives us a competitive advantage, (3) Individuals perform their best when they feel they belong, and (4) Our priority is to be a responsible business, acting lawfully and being responsive to the business environment.

and

We are also excited to introduce a new concept: the power of OUR “Golden Rule” - treating everyone with dignity, fairness and respect, always. For the last several months, a small team has been working on refining our language to better capture McDonald’s commitment to inclusion.

It sounds to me like McDonald’s is looking to better understand its stakeholders through its communities and material employee advantages while operating within legal boundaries. They also critically recognize that carefully selected language opens up the opportunity for continual work while managing the reputational risk around the confusion of other terms.

It is inaccurate to say that McDonald’s is ending their DEI program.

Moving onto the financial services news and the pullbacks from net zero alliances, this is undoubtedly worrisome. After all, Larry Fink, CEO of BlackRock, is often credited with starting companies down the ESG path from his annual CEO letters beginning in the mid-2010s.

Yet, despite banks and investment firms pulling out of net zero alliances, the energy transition is well underway and needs to be funded. That is a financial opportunity. JP Morgan’s Global Head of Sustainability, Heather Zichal, attended NYC Climate Week and participated in this Q&A, which includes material intersections with sustainability, namely financing the green and energy transitions. In addition, the GSIFIs, including JP Morgan and Citi, are still largely aligned with PCAF reporting methodologies, which is no easy task.

Despite BlackRock being the latest asset manager to pull out of NZAM, I encourage you to read their freshly published proxy voting guidelines. These guidelines outline material ESG components, including climate risk, natural capital, companies’ impact on their workforce, supply chains and communities, human capital management, and corporate political activities. While the acronym “ESG” doesn’t appear, material issues like these are ESG. Just don’t tell anyone, as ESG is a trigger word for conservative-fueled litigation.

The FT article about BlackRock’s exit takes a page from the AP, ending with a point from their letter to investors that must not be overlooked.

BlackRock said its departure from NZAM “does not change the way we develop products and solutions for clients or how we manage their portfolios. BlackRock’s active portfolio managers continue to assess material climate-related risks, alongside other investment risks.”

And so, it is also inaccurate to say that the financial markets are moving away from ESG considerations.

In addition, McDonald’s, JP Morgan, and BlackRock all have positions open for various ESG-related work. If you know where to look, things aren’t quite so dire. But there’s more. The challenges to DEI and ESG seem to have interesting side effects. Not only are leaders figuring out that there is value in their existing approaches with a little tweaking, but it turns out that companies don’t like being told what to do.

A healthy tension is forming

Believe it or not, I am rarely an optimist. However, despite the rash of splashy headlines, I’m still not seeing the substance change. If anything, the deeper investigation encourages me to believe that companies finally understand the intersection of ESG topics and business value or are moving in that direction.

Still, if there is one thing that boards and management teams don’t like, it is being told that they don’t know how to run their business. And so, we’re starting to see a healthy tension between politics and business.

Last month, Exxon Mobil’s CEO came out against the popular Trump mantra of ‘drill, baby, drill’ because of the realities of oversaturation in the market and price fluctuations.

This week, we saw Apple’s proxy statement, which included the boilerplate anti-DEI resolution from the same proponent that filed at Costco. The response itself was tepid and didn’t call out material connections to stakeholders or the proponent’s intentions, but it did include this note:

The proposal inappropriately seeks to micromanage the Company’s programs and policies by suggesting a specific means of legal compliance.

There are limits to what politics can get companies to do, and we’re starting to see the cracks. The kowtowing CEO and business activity might very well be transient.

Checklist for moving forward

You’ve probably noticed that this is a pivot from saving the world and its people to saving the company, and you are likely disappointed. Don’t be. As I wrote in ESG Mindset, the path to impact runs through material change. Once a company understands and begins to address its material challenges, it can build a defense to other projects.

I encourage you not to despair and to channel your energy productively. Make your work material to find the impact in the long term.

For boards: Be careful which other boards you follow and what advisors you are listening to. Don’t lead your company’s strategy by what the headlines read because you might find yourself misaligned with reality. Your company may also be outpaced by sustainable innovations with a higher cost to catch up later.

For everyone: I advise researching and diving deeper into what’s happening, especially if someone else uses headline evidence to make a point. If you have a board member’s ear, actively listen but challenge and set the record straight. This is also good advice for challenging the media narrative and engaging on social media.

Lastly, remember that changing company policy based on political rhetoric rather than legislation and regulation means you ultimately concede control of how you run your business to others. This is the point of the anti-ESG crusade, and the door swings the other way, too. This alignment is one considerable governance risk, and doing so might mean you end up on the couch in my office again for another session.