January 11, 2023

ESG: What is the outlook?

Posted on January 11, 2023 by Bessie Daschbach

Environmental, Social and Governance (“ESG”) marked 2022 news headlines—and it wasn’t all good news. Among the many ESG developments was a wave of anti-ESG activity at both the state and federal levels. All this activity begs the question: what is the outlook for ESG?

ESG Pushback

At the state level, pushback against ESG was pointed.

Louisiana pulled nearly $800 million from BlackRock Inc. funds, citing BlackRock’s views on ESG investing. Missouri followed, pulling $500 million out of pension funds managed by BlackRock; and Florida took the strongest stance, announcing it would pull $2 billion worth of state assets managed by BlackRock.

To date, 18 states have proposed or adopted anti-ESG legislation. While the bills differ, the aim is the same—to curtail business with entities characterized as “boycotting” industries based on those entities’ use of ESG criteria or considerations.

Compounding the legislative push, a number of attorneys general have instituted investigations into companies with ESG initiatives, contending those companies’ use of ESG metrics violates state consumer protection laws, state and federal laws governing investors’ fiduciary duties, antitrust laws, and/or state laws designed to protect the nation of Israel.

Pushback was also rife at the federal level.

The frontrunner was a letter sent by a group of Republican senators to fifty law firms admonishing those firms of the “risks” their clients incur by participating in “climate cartels and other ill-advised ESG schemes” and further advising that those firms and clients preserve relevant documents in anticipation of investigations relative to the use of ESG metrics.

Since the senators’ letter, at least one House bill aimed at ESG has also come to the fore—H.R. 9543, titled the “ESG Rule Prevention Act.”

Pushing back on the pushback

Despite the swelling anti-ESG wave, proponents of ESG remain stalwart and are doubling down on the business case for ESG.

D.C. attorney general Karl Racine rejected the notion that non-financial criteria drive ESG. As to companies’ use of ESG criteria and considerations, Racine was unequivocal: “If your intention is to make as much money as you can while exercising prudence on the risk side, it’s perfectly legal.”

Likewise, Jeffery Sonnenfeld of the Yale School of Management tidily summed up the business case for ESG: ”Companies’ social impact matters to their financial bottom lines.”

Even more on the nose, the Kentucky Bankers Association responded to the Kentucky attorney general’s efforts to enforce Kentucky’s anti-ESG statute by filing suit, citing to Association members’ engagement on ESG issues as a matter of course.

As the year was coming to a close, Fortune ran a commentary by Brian Stafford, CEO of Diligent Corporation, in which Stafford responded to anti-ESG sentiments, touting “resilience and sustainability” as the “two things” in the interest of shareholders. Stafford called out anti-ESG rhetoric as short-sighted in light of the economic, social and political changes afoot—changes he characterized as creating “unparalleled, dynamic risk.” Stafford went on to observe that “most C-suite executives and board members [he] interact[s] with understand that while stakeholder capitalism and ESG may be imperfect, they are here to stay.”

Following Fortune, Forbes opened the New Year with an “invitation” from Robert G. Eccles, tenured Harvard Business School professor now at Oxford University and prolific voice on ESG, in which Eccles offered to meet with any “Republican politicians who are concerned about ESG.” In Eccles’ opinion, “’fiduciary duty’ … actually requires that companies and investors take these material ESG risk factors into account.” As he views it, “ESG is simply about the sensible management of material risk factors by both companies and investors”—all for “shareholder value creation.”

According to longtime fund industry analyst John Hale, Ph.D., CFA, the “anti-ESG campaign” is not coming from investors or corporates. To the contrary, recounting survey results, Hale concluded:  “[A]sset managers are incorporating ESG to better understand their investments and to encourage companies to address material ESG issues facing their business. It’s not about politics. It’s about understanding the particular risks to an investment of issues like climate change, or poor employee relations, or a host of other material ESG issues that often vary by industry or company. It’s about asset managers fulfilling their fiduciary duty in the 21st century….[C]orporations are incorporating ESG because it’s just good business. And they are speaking out against conservative positions on many social issues because they think those are bad for the overall business climate, bad for their own business, or bad for their employees.” Pressure in favor of ESG from customers and the workforce has also been evident for some time. At the very start of 2022, Robin Nuttall, a leading ESG expert at McKinsey & Company described “a shift in stakeholder attitudes across the board.” As to employees, Nuttall noted that “70 percent now demand purposeful work,” and that they “want the company to take a strong position on social issues.” Likewise, according to Nuttall, “Customers are also making choices in the market based on purpose and sustainability. Millennials and Gen Z have very different attitudes to purpose than baby boomers do and are much more favorable toward sustainable businesses.” In other words, pressure in favor of ESG is coming from all sides—external and internal.

What lies ahead?

A central theme among anti-ESG activity is that ESG serves as a surrogate for liberal agenda items not otherwise advanced through governmental tools and, more pointedly, that ESG is a threat to capitalist free markets. But, as those citing (often their own) business interests in favor of ESG substantiate, ESG is the product of these very markets—specifically investor, customer and labor markets communicating their expectations and demanding that those expectations be met. Therein lies the business case for ESG.

Questions as to what may be ahead for ESG certainly abound. Not the least of these questions are legal ones. Will the congressional authors of the letter to law firms pursue the threatened investigations? And, if so, will the named basis for doing so hold? What will become of the attorney general investigations and anti-ESG state statutes? How will those statutes be employed? What legal challenges might the statutes themselves face?

All these questions aside, one thing seems certain—headlines for the coming year will be marked by news covering the trajectory of anti-ESG developments. But, given the unimpeded pace of ESG developments over the last year even amidst the wave of these anti-ESG developments, together with the stated (and re-stated) business case for ESG, it is fair to assume ESG is not going away. So long as markets demand it, the outlook for ESG is that it is here to stay. That is after all how capitalist free markets work.