ESG is the Charlie Brown of business acronyms
It's one of the main characters in the markets and business, but good grief!
It seems unavoidable to write about ESG outside the context of politics as of late. Despite the reality that ESG is a non-political issue focused on material risks, opportunities, and long-term growth, it just can’t break through the noise.
The anti-ESG pushback and the culture wars in the US have led to a groundswell for Republican candidates leading into the 2024 election. We’ve already seen conservative state Treasurers in the US back away from ESG, despite the insane costs to pensioners. Even Texas, which has the most wind power of any state and has massive solar energy opportunities, is turning its back on renewables to who knows what kind of potential revenue loss.
Still, the ESG attacks differ depending on the target. Across financial services firms and the environment, corporates and social issues, and the often left behind governance (which I’m not even covering this week, really), ESG is like Charlie Brown and the kite-eating tree (let’s say this is E) or him getting the football pulled away by Lucy (let’s go with S). It is predictable how it will end whenever he tries either of these things.
Financial services firms pull back from the Environment but individually move forward
As a result of intense Environmental pressure, several alliances have formed over the past few years around net zero, like the Net Zero Asset Managers initiative (NZAM) and Net-Zero Insurance Alliance (NZIA). These groups focus not on material ESG or long-term growth but decarbonization and long-term impact. Indeed, financial services firms and their investments must pursue lowering and eliminating carbon emissions. Still, it isn’t always material, even with transition risk, as transitioning to a low-carbon economy will impact companies differently.
Recently, these alliances have had members pull out, including five insurers from NZIA. It appears that this is due to the risk of anti-trust lawsuits, political noise, and the restrictive nature of these groups, leaving these firms to pursue sustainability on their own for now.
One of the higher-profile firms to leave an alliance last year was Vanguard, which left NZAM in December. There are three things in its public statement about the move of note:
The recognition that climate change will have “far-reaching economic consequences.”
“…material risk identification and disclosure is a critical priority for Vanguard.”
👆This one is ESG!Industry alliances can build constructive dialogue but also result in confusion through collective goals.
While I’m thrilled at the prospect of material risk, the last point seems the contentious one. As we saw at the House Oversight Committee meeting on ESG a few weeks ago, these alliances were called out several times, including this note by Steve Marshall, Alabama’s State Attorney General.
Since President Trump's election, the global elites have formed at least ten alliances dedicated to implementing radical ESG plans.
These alliances are getting scrutiny from Attorney General’s, seemingly ready to leap into legal action. As a result of this political noise, a Governance risk of its own making has formed as some banks have been blacklisted by conservative states (psst…this hurts states by costing them money).
For now, it seems financial firms and their alliances are mostly experiencing anti-ESG political pressure around the Environment, and it appears to be working.
Can financial services firms escape Environmental risk?
This leads us to an interesting comment that Vanguard CEO, Tim Buckley, made in an interview this week.
ESG funds are not the next great innovation. They’re a client preference, and we need to treat it as such.
OK, so let’s unpack this.
First off, Sustainable funds are a client preference where clients use their capital to fund companies aligned to their values. ESG funds may be a preferred way for clients to manage risk, but it’s the incorporation of this risk that asset managers should be doing already, and what Vanguard called out above. Mostly everyone conflates these two, including financial services firms, despite my little newsletter trying to clear the air.
The reality is that financial services firms cannot escape climate change risk, nor can politicians or anyone. In fact, over this past weekend, State Farm announced the following:
State Farm General Insurance Company®, State Farm’s provider of homeowners insurance in California, will cease accepting new applications including all business and personal lines property and casualty insurance, effective May 27, 2023. This decision does not impact personal auto insurance. State Farm General Insurance Company made this decision due to historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market.
Followed this line:
We take seriously our responsibility to manage risk.
And here we have ESG at work. Climate change (E) and the rising costs of construction, and a challenging reinsurance market have led to the decision (G) to pull new applications for home and business customers (S). This is a tough one as it could just be the beginning of a massive insurance market shift, but it is still a great example of ESG nonetheless.
Florida might be the next place this shift happens. Per climate.gov, over four of the last six years, the cost of California wildfires has exceeded $65B. The same report cited one storm, Hurricane Ian, causing twice that amount in just one year ($112.9B). The same issues that exist in California exist in Florida, just with a different climate change risk.
And so, despite the Environmental noise around financial services firms, risk will likely lead the current approach in the US. If the multi-nationals in Europe follow suit has yet to be seen. Still, I’ve not heard of this Environmental pullback from corporate alliances yet, even though they also feel the same political pressure.
It’s essential to keep in mind that politicians are fueling these efforts. For example, Florida Governor Ron DeSantis called climate change the politicization of weather, yet in his war in Disney over a Social issue (‘Don’t Say Gay’), there is no recognition that he has politicized business, something that creates jobs, generates tax revenue, and builds up the local (or in this case, the state) economy. And with that, we get to how corporates fare with the middle letter of ESG.
Corporates are struggling with social and stakeholders
Interestingly, outside of Texas’s pullback from renewables and broad fossil fuel and coal pushes over the last few years, I haven’t seen companies pull back from their Environmental transitions or receive the same pressures that financial services firms face. While these firms are pulling out of sustainability and decarbonization-led alliances, companies are still mired in pursuing accurate carbon disclosures, with some making progress on material Environmental changes.
Where companies seem to be struggling lately is with Social. Bud Light STILL gets too much attention for working with a transgender influencer, Dylan Mulvaney. But this case has served as a template of sorts, as many companies who are attempting to enter new markets are stuck in a cycle of:
Trying something new with stakeholders to capture a new market
Feeling the conservative backlash for being too inclusive
Rolling back the effort entirely
Upsetting the new market to maintain the old, who are also still upset
Let’s look at a recent example.
Target’s CEO, Brian Cornell, was coming off of a week where he celebrated a stellar period of growth since 2020. In an interview, he credited the company’s approach to DEI and community engagement for the revenue increase (I wrote about this last week). Of note was a particular store in Inglewood, California, that hired a local artist to paint a mural, leveraged diverse workers from the community, and included Spanish signage in the store. This is an excellent example of stakeholder engagement.
Yet, on the other hand, June is Pride Month, when LGBT is celebrated. Many companies will switch their logos on Twitter and LinkedIn and incorporate Pride into their products and services to show support. Target launched merchandise and set up displays around Pride Month, and conservatives were not having it.
Confusing outrage over the matter has led to real-world consequences as violent conservative consumers have destroyed Pride Month displays at Target, leading the company to pull back efforts to keep employees safe. It didn’t take long for LGBTQ groups to condemn the rollback. And round and round the cycle goes.
At the start of this cycle are media outlets, who are shamelessly fueling these non-controversial matters. Articles that pre-emptively question every company’s Social strategy through (check notes) ‘social media posts’ appear to be popping up to goad angry consumers further. For example, The Street reported above that Apple released a new Pride Edition Apple Watch band in a sensational matter that showcased opposing social media reactions that literally anyone could source from their Twitter account. Meanwhile, other outlets covered the announcement more reasonably as a simple product release.
Another example is Disney’s live-action “The Little Mermaid.” The film has been mired in similar controversy since the trailer last year and picked up some flack from the LGBTQ community upon Ursula’s appearance, yet it is on track to make $117M this Memorial Day weekend.
Maybe media outlets need to stop checking social media to determine what’s a problem, as companies simply can’t keep up.
Side note: The drive-in theater was SLAMMED for “The Little Mermaid” this weekend. I’m pretty sure none of the kids and most parents who went to see it could care less about any of the controversies.
When ESG kicks the football, it will be glorious
There is no doubt that financial services and corporates are struggling right now with the definition of ESG and its applicability to investing and business. Financial Services firms seem mired in questions about Environmental risk and responsibility, and corporates are struggling with new Social identities and markets. The former struggles with clarity, leading to political posturing, while the latter is mired in solely political posturing.
Should we just scrap ESG and start over? Some financial services firms are proceeding cautiously with the acronym’s use. Still, I haven’t seen a general backing away from corporates from the E or the S. Still, I’m also not sure many truly understand the term compared to non-material sustainability, DEI, and other matters.
Still, both need to be cautious. Suppose neither can clearly define their approach to ESG. In that case, they will likely waste time chasing non-material matters and getting in trouble, leading to a cycle of constant failure, despite repeated attempts.
Let’s also be very clear on ESG. In this opinion piece, the author suggests the following about ESG:
What was intended to be a kinder, gentler form of capitalism has morphed into a kind of economic fascism that places the arbitrary interests of a small cabal of people — asset managers, bureaucrats, global financiers — ahead of consumers.
No asset manager with fiduciary responsibility would advise a company to ignore its stakeholders as this is a risk. This is one thing that is becoming increasingly difficult for companies as aligning with stakeholders in new markets represents an opportunity, but not if alignment with existing stakeholders is threatened. The real risk for companies is this: The people raging against your decisions might not actually be stakeholders anyway. You may risk alienating pretend stakeholders for real ones.
Still, companies eventually may start backing away from ESG, but not using the acronym won’t change anything.
Regardless if ESG makes it or not, conservatives will rage around what financial services firms and corporates do around these issues. For example, Bud Light didn’t ‘conduct an ESG marketing campaign,’ they worked with a transgender influencer to capture the influencer’s audience. Apple didn’t ‘add ESG to a watch band,’ they supported Pride Month in their product for a subset of consumer stakeholders. It isn’t like companies are shouting, “Hey! We’re doing ESG over here!,” even with various ESG reports being published. As with everything ESG and CSR, words matter less than what you do, and I don’t see companies shifting strategies outside of the acronym’s use.
To illustrate this point, we can return to Charlie Brown. In 1962, Charlie Brown confided in Lucky that he dreamed his friends would call him “Flash.” Violet and Lucy had quite a good laugh because he is still the same old Charlie Brown, despite the cool name. Still, for the next 40 years after, Charlie Brown tried to fly kites and kick the football. Financial services firms and corporates must persist because risks and opportunities are not going away.
And so ESG is a bit of the Charlie Brown of business acronyms. Despite the pushback, it is still worthwhile if done with materiality and stakeholders in mind. My advice to both groups is this:
Lead with material risks and opportunities which are defensible.
Learn from these experiences and continue driving value, then save the world.
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Don’t miss me on The Peggy Smedley Show at 1:15 PM ET, talking about corporate ESG.