The Postmodern Battle over ESG

It is difficult to define what winning means in this ideological conflict

Photo by Florida-Guidebook.com on Unsplash

Last fall, just before the 2022 midterms, I spoke at an investor conference and was asked how a GOP takeover of Congress would affect the trend towards environmental, social, and corporate governance (ESG) investing. This has been a push by some investors to make sure that the firms they own stock in adopt policies designed to promote environmental sustainability. According to Wikipedia, “In less than 20 years, the ESG movement has grown from a corporate social responsibility initiative launched by the United Nations into a global phenomenon representing more than US$30 trillion in assets under management.” According to one investment forum, more than $8 trillion — or 1/8th of all U.S. assets being professionally managed — are in line with ESG principle. That is a lot of money. The passage of the Inflation Reduction Act will further incentivize ESG-compatible investments

I was a bit flummoxed by the question about ESG and Congress. It was not that I doubted GOP opposition to ESG policies; in a way, the push towards ESG represents the most concrete definition some Republicans had of “woke capital.” My confusion was over what Congress could possibly do to stop the process. ESG did not start as a regulatory mandate but as a push from institutional investors. Even overturning the IRA would not slow that train. The only way Congress could truly stop ESG was to enact activist regulation restricting the ability of firms to adopt such policies. I knew that the GOP were largely hypocrites when it came to opposing the heavy hand of the state, but this seemed egregious even for Ron DeSantis.

My other source of puzzlement was simple math. Even if the GOP had captured both the House and Senate, Biden would veto any anti-ESG legislation that came to his desk. There was no way the GOP could get the necessary 2/3rds support for an override in either chamber of Congress. So I said that while there might be very noisy hearings on the subject, there would be no change in the rules.

In a promising sign of not sucking at my job, this is pretty much exactly what happened in Washington. There were a lot of scheduled hearings that made a lot of noise. The GOP was actually able to pass legislation with a few moderate Dems supporting the bill in the Senate — and then Biden used the first veto of his presidency for this bill in March of this year. There have been a few noisy hearings since then, but the legal status quo persists. There has also been some efforts to thwart ESG at the state level, but according to the AP they have encountered opposition from business groups. That story also highlights, “fears that state pension systems could see huge losses” from shifts in ESG policies.

So that, it would appear, is that. Which makes sense. This seems like a classic case of trusting the market to work itself out. According to one 2022 Ernst & Young survey of close to 400 global institutional investors, 80 percent of respondents said that firms should make investments to address ESG issues even if doing so reduces profits in the short term. On the other hand, broader surveys show support for ESG dropping if it affects the bottom line — which also makes some intuitive sense. That tension suggests that while the role of ESG investments will continue to grow, there will continue to be fiduciary limits.

Today’s Wall Street Journal story by Mark Maurer, however, suggests the GOP assault on ESG might have yielded a different set of benefits: firms are no longer bragging all that much about their environmental, social, and corporate governance:

Companies’ mentions of green and social initiatives during earnings calls have fallen off sharply in recent quarters, reversing a more boastful approach taken over the past few years amid intensifying pressure from some investors and conservative activists….

Finance chiefs and other executives have significantly quieted down in public settings about their environmental and employee diversity efforts as opposition has mounted from a confluence of interests: investors who want companies to focus on their operations, not the social good, and conservative groups and political leaders who have seized on corporate support of such causes to rally “anti-woke” constituents—for example, calling for boycotts of brands that advertise their support of the LGBT community in the wake of recent disputes with Target and Bud Light.

“The easiest thing to do is just to stay out of the conversation and emphasize other facets of business that are going to be perceived as less controversial and more core to the traditional metrics of the business,” said Jason Jay, senior lecturer of sustainability at Massachusetts Institute of Technology. 

Executives at U.S.-listed companies mentioned “environmental, social and governance,” “ESG,” “diversity, equity and inclusion,” “DEI” or “sustainability” on 575 earnings calls from April 1 to June 5, down 31% from the same period last year, according to data from financial-research platform AlphaSense. That is the largest such year-over-year decline and the fifth consecutive quarter of year-over-year drops, following a pickup in these discussions and corporate social efforts in the wake of the police killing of George Floyd in May 2020.  

One could argue that even if anti-ESG Republicans have failed to enact legislation limiting ESG policies, they have succeeded in the more postmodern task of turning ESG into a partisan political football akin to critical race theory (CRT). Republicans have been fond of spotting CRT where it does not exist, thereby forcing school districts and universities to engage in what amounts to a de-risking project designed to reduce CRT’s profile.

If the WSJ story is correct, it might seem that ESG is the next initiative to face de-risking. Except that the story does not say that ESG initiatives are slowing down:

There is little sign that public companies are pulling back from the initiatives themselves, such as DEI employee training and emissions reductions. 

Companies still regularly voluntarily issue detailed sustainability reports, disclose greenhouse-gas emissions and tie a portion of their executive compensation to ESG metrics….

What’s more, 70% of U.S. chief executives said that their company’s ESG programs improve their financial performance, up from 37% a year earlier, according to a KPMG survey released last October. 

The corporate logic of shutting up about ESG makes sense. Why rile up a political firestorm if it’s unnecessary?¹

Is the GOP’s success in getting firms to stay quieter about ESG a prelude to reversals of policy? That is clearly the goal, but here is where the IRA’s incentives and shifts in public opinion seem far more powerful. Even if the GOP succeeds in riling up a moral panic within its base, this seems like a battle in which the tide is clearly heading in one direction.

But I could be wrong. That is the thing about policy debates in this decade. They do not revolve around policy disputes, or even political disputes. They revolve around whether one party can sufficiently mobilize its supporters to be able to force other actors to engage in de-risking behavior. And in this kind of ideological battle, what matters is not the actual outrage but the perceived outrage by corporate officers.

I suspect ESG is here to stay — but this is an ideological battle worth observing as a template for future sub rosa political conflicts.

1. This also works to preemptively mute progressive critics of ESG as examples of corporate “greenwashing.”