The governance tipping point is here
Companies are about to learn what it means to deal with ESG issues alone
We just came through perhaps the most stable political time we will see for the next four years, where the threat of climate disclosure regulations was the primary corporate disruption. Despite the SEC’s version of a climate disclosure rule being dead now, the pressure around ESG reporting within value chains is unlikely to abate, meaning all of those disclosures are unlikely to go away if you want to do business globally.
Still, it’s never been about the disclosures for many of us.
For all of us working in the corporate and investing worlds, the hard work is about to get more challenging, but it might not take shape in how you think. For companies to navigate an onslaught of global complexity and ambiguity, it is time for the last pillar of ESG, Governance, to get its turn in the limelight.
A brief history of CSR and ESG
Let’s get oriented around the evolution of corporate sustainability and ESG and remind ourselves when things progress around politics.
Corporate Social Responsibility started in the 1960s during a period of social activism and two back-to-back Democratic presidents, Kennedy and Johnson. In response to this movement, the Friedman Doctrine, which promoted shareholder primacy, was published in 1970 when Republican President Richard Nixon was in office.
In the leadup to ESG, which the UN Environmental Programme Finance Initiative created, Democratic President Bill Clinton was in office. Around this time, we saw severe localized governance issues at Worldcom and Enron. By the time ESG was released in a 2004 report, Republican George W. Bush was President.
For a while, companies didn’t focus on ESG. But then, before Trump took office, Larry Fink wrote about stakeholders and climate in his annual letter to CEOs. Throughout Trump’s presidency, the yearly letters continued, and the Business Roundtable, a group of US CEOs, switched their messaging from shareholder primacy to the stakeholder economy.
Two pillars of ESG tipped over into investor and business thinking quickly from there:
First, the severity of extreme weather events in the global north, including hurricanes, flooding, and wildfires, increased.
Second, the murder of George Floyd, on camera, was a powerful reminder of social inequities and COVID-19 impacted the world.
As a result, environmental and social considerations gained corporate attention, but a systemic issue hasn’t caused governance to tip over yet. Sure, we had the 2008 global financial crisis and COVID-19, which required companies to all navigate the same external pressures. The financial crisis was an economic matter created by poor governance. The pandemic was more of a social issue requiring quality governance to navigate.
Despite the political winds, ESG and corporate sustainability progressed. It seems we have a systemic governance issue for the first time, and boards need to step up.
Uncertainty leads to an indirect tax on companies
With over seventy elections globally behind us this year, it is now clear that many voters have rejected the incumbent party. That brings one level of uncertainty, but companies can easily navigate emerging policies as long as those parties are established and consistent. After all, this isn’t necessarily anything new.
Still, this means that new global power structures will be in play as Trump returns for a second term. These are leaders who may or may not have experience dealing with him. Compounding this change in political structures globally means that no company can know what Trump will do, what policies may come, or how federal government agencies will respond (or not). This political-fueled polycrisis may combine with other issues to tip over governance as the focus over the next four years.
A lack of oversight puts pressure on companies
While businesses don’t like regulation, they play an essential part in our markets and help protect the public, stakeholders, and even the company. The Supreme Court recently overturned the Chevron Doctrine, which gave US government agencies an ‘appropriate’ level of oversight of their areas without the need to pass laws for everything. Trump has stated he wants to gut federal agencies, setting the stage for no oversight.
If you think this combination of regulatory pullback is good news, think again.
For example, one public target has been the Food and Drug Administration (FDA), which approves drugs and medical treatments (like vaccines) and monitors food safety (like the recent onion recall at McDonald’s).
Just because there is little oversight doesn’t mean there won’t be costly litigation and real-world consequences when your company harms the planet or stakeholders. Unrestricted license to operate unchecked may lead to real-world consequences, lawsuits, and reputational damage. The onus will be on the company to self-regulate in a way you might not be prepared to think about, report, or act on.
No one is coming to help in a disaster
It is also well-established that extreme weather events are getting more severe. For example, my area in Pennsylvania set a record for the lowest rainfall in any month during October 2024 (.02 inches), and we are under a severe drought. Last week, a wildfire on Blue Mountain burned 577 acres of land over three days. This isn’t just a localized problem, as Fast Company is reporting that The water bubble is about to burst:
Water scarcity is increasing, water quality is deteriorating, and cities and states are scrambling to address these challenges.
The Trump administration will oversee this issue over the coming years or decide to push it to the states. This is just one climate risk example, though. Biodiversity collapse and increasingly severe extreme weather events will not stop with an administration change. These issues will impact agriculture, which represents around 6% of the US GDP.
Climate risk is also not bound by state borders and stretches across geographical areas. Who knows what states might do without federal oversight to address these issues for their citizens? One thing is sure, though: Companies won’t be able to reliably rely on the government to come to their rescue. In late 2020, the Trump administration declined to assist California after hundreds of thousands of acres burned in a devastating wildfire. This wasn’t limited to California, as Utah didn’t get financial support from wildfires either due to a personal dispute with the governor.
On the other hand, after a tornado struck one of Pfizer’s manufacturing facilities in 2023, a material climate risk issue that made it to their 10-K, the FDA was there due to the facility’s importance to the US healthcare system. More recently, FEMA, the U.S. Small Business Administration, and the U.S. Department of Agriculture worked to create resources for small and medium-sized businesses affected by Hurricanes Helene and Milton.
Companies should already understand the climate risk because climate regulations often require it, as it is material. Companies must understand their climate risks and act to protect their physical assets and employees, if not before, now.
With the uncertainty about how well the government will be able to respond to crises, companies will have to step up to protect themselves.
If you are an optimist, I’m saying that the lack of government support will bring about what I’ve long argued needs to happen: Companies need to own ESG.
Only an active board can deal with this polycrisis
My friend Andrea Bonime-Blanc once wrote, “The time of sitting inactive on a board is over.” In other words, with the ESG regulatory and real pressures, board leaders can no longer sit inactive and do nothing.
If I remember correctly, she wrote this during the Biden administration. I find this statement more accurate than before. The sheer uncertainty a Trump administration brings when combined with climate, social, and other global forces is massive, and the media has picked up on this theme. A board cannot sit and react to everything, and despite which side of the political spectrum you fall on, one thing is sure: we are entering a period of uncertainty.
From The Economist: Welcome to Trump’s world
Our hope is that Mr Trump will avoid these pitfalls, and we acknowledge that in his first term he mostly did. Our fear is that during this presidency he will be at his most radical and unrestrained, especially if, as America’s oldest-ever president, his powers begin to fail him.
From the Financial Times: Can economics model Trump?
Calibrating Trump’s economic policies is extremely difficult. Explaining them is harder still.
From the Wall Street Journal: What’s at Stake With the Federal Reserve, Now That Trump Has Won the Election?
The actual effect of Trump’s policy proposals on growth or inflation are highly uncertain, and would depend partly on the makeup and inclinations of Congress and trade negotiations with other countries.
From the New York Times: Under Trump, Tech Giants Like Apple and Meta Face a Familiar Uncertainty
Mr. Trump’s treatment of the tech industry during his first term was unpredictable and at times lashing.
His regulators filed antitrust charges against Meta and Google and launched investigations into Apple and Amazon. He accused Meta and Twitter of censorship, resulting in Republican-led congressional hearings grilling tech executives. He moved to ban TikTok and blasted Amazon for shirking its tax obligations.
From Al Jazeera: Trump’s likely re-election plunges global economy into uncertainty
A win for Trump would be a hammer blow to the decades-old project of globalisation, which was already under strain amid a growing consensus on both the left and right that the free movement of goods and people has failed ordinary people.
From the Associated Press: European summit will focus on how to accommodate Trump during his second term as president
It was already beyond doubt that the transatlantic relationship would change after Tuesday's vote. But under a Democratic president, that was expected to be gradual. Based on Trump's own campaign promises, seismic changes may lie ahead.
I’m calling these articles out because this is what the world is saying, not something I’m manifesting. However, I will give you my take:
Governance is about to become the most pressing pillar of ESG, and only the board and company leadership can navigate the company through the next four years of uncertainty. Successfully doing so requires an advanced level of engagement and subsequent action.
Let’s take an early example of the uncertainty from ESGNews.com with Elon Musk Gamble on Trump Pays Off – What This Means for the EV Industry.
It is well-known that Musk is a rampant Trump supporter and may find a place in his cabinet. Putting how he would do that while leading six companies aside (another governance issue), what does Musk’s relationship with Trump mean for EV development? Could the Inflation Reduction Act grow and add new investments to support charging infrastructure? Indeed, such a move would benefit Tesla and EV adoption.
Then again, it is already being widely reported that Trump will remove the US from the Paris Climate Accords (again), expand LNG exports, and roll back public land protections to drill for fossil fuel development.
This volume of uncertainty is the tipping point for governance.
One big stakeholder just showed up in every boardroom
You might think greenhushing or pulling back on ESG efforts is the answer if you are a company leader. That is understandable as every company now has one big stakeholder they must worry about as they make decisions - the new President.
For example, earlier this year, Trump targeted John Deere for moving part of its manufacturing out of the US to Mexico and threatened tariffs, forcing the company to respond.
Take big tech as another example. One-third of US economic growth comes from big tech. I’ve listed some of Trump’s big tech targets in the New York Times article above. Last week, big tech CEOs congratulated Trump, causing some to wonder if they were kowtowing early. I see this reach-out as a calculated governance move to hedge against reputational risk with this new stakeholder.
But here’s the reality. Reputational risk alone cannot manage your business and its unknown stakeholder threats. ESG represents material, non-financial risks and opportunities that you have to address proactively or be subject to them reactively. For some companies, managing these risks and opportunities is a bet they make, just like with insurance. For others, if you lead with the business perspective around ESG issues, you might be questioned by political leaders, but shareholders will be on your side at least because you are managing your business well.
Overall, boards must protect the company and its value, and it is now more critical than ever to examine ESG through this lens. In many ways, Trump’s election, combined with other global issues, has become a new tipping point for governance, as it is one that all companies in the US and abroad will need to face, requiring boards to plan and act.
Boards abroad are likely not as polarized in the US as the left and right may be more close to the center. For US boards, the polarization might mean this issue and its new stakeholder cannot be adequately discussed openly and honestly, even at the board level. As I mentioned in my side note last week, if your board can’t put aside political differences to discuss the election (or this new administration) openly as a governance concern, there are more significant issues to address.
I’d love to be able to give some advice here for board members and company leaders, but every board operates differently with varying levels of power and influence. The only way to ensure the company is protected, and building toward long-term resilience is to leverage individual power structures accordingly. As we’ll see next week (unless something up pops up), is that this power structure is about to become more critical to sustainability and ESG investors.
I’ll leave you with this thought. Dissent can be weathered and even productive in a trusted board environment, but consensus must be gained to move the company forward and build resilience through this upcoming uncertainty.