The ESG backlash, and what it means for progress

As ESG investing and stakeholder capitalism continue to grow, so too does opposition. What started as a small group of critics has rapidly developed, with Texas (the second largest US state by GDP) recently publishing a list of 10 firms state investment funds will be required to divest from, and around 350 funds they will be banned from investing in. This came the day after Florida banned state pension managers from investing using ESG. 

Opposition is not limited to the US; in July UK publication The Economist published an eight-part series methodically critiquing numerous elements of ESG investing. But how important is this? Could this pushback be a natural side-effect of evolution, and an opportunity for sustainable investing efforts to become more meaningful and measurable, or will it only serve to delay net zero commitments and a more sustainable future?

Why the criticism?

The primary focus of critics is weak and inconsistent implementation. Some companies have been accused of re-branding older, existing funds as green in name only to cash in on the ESG trend. Unsubstantiated claims around ESG practices make way for allegations of greenwashing and virtue signalling, resulting in an increasing rate of legal action around misconduct and misstatements. 

Secondly, ESG is poorly defined, and lacks regulation. There are numerous frameworks to guide business disclosure, but adoption is voluntary and uneven. It’s argued that ESG has been politicised, linked with “wokeism” and accused of advancing leftist social objectives. 

Just this week the Financial Times has reported that anti-ESG Strive Asset Management’s US Energy ETF (DRLL) has attracted $315mn in less than a month. Vivek Ramaswamy, executive chair of Strive says “People are voting with their feet… We are representing the voices of a lot of everyday citizens who have their money invested by other asset managers used to advance social and political agendas that they do not agree with. That’s a breach of their fiduciary duty, in my opinion”.

Former Vice President Mike Pence shared a similar sentiment in the Wall Street Journal earlier this year. Pence described ESG as a shift in the investment world “entirely manufactured by a handful of very large and powerful Wall Street financiers promoting left-wing environmental, social, and governance goals and ignoring the interests of businesses and their employees.”

What critics miss

Recent technological, environmental, geopolitical and societal disruptions have all highlighted the importance of ESG issues and related stakeholder interests. Though in recent years, employee wellbeing in global supply chains and broader social inequality have been thrust into the spotlight, The Economist’s ESG Investing series concludes that the single focus should be emissions. 

But we know that social-related shareholder proposals are on the rise. Of course the climate crisis requires attention, but so too do the interconnected human rights violations, labour abuses, growing inequality and political systems under which these occur.

ESG is complex, and far from where it needs to be to match the level of its promise. While the U.S. and EU are starting to prioritise and clarify objectives, there is no doubt that the sustainable investment landscape is flawed, and that there is a lot more work to be done by policymakers, regulators, companies and investors. Clarity on how sustainability is to be measured, contextualised and targeted will be required for meaningful policy. There needs to be more shareholder engagement and voting, with transparent, robust and comparable information. The International Sustainability Standards Board (ISSB) was formed in response to this demand, intending to introduce “a comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with information about companies’ sustainability-related risks and opportunities to help them make informed decisions.”

Enforcement ramped up last year when the SEC launched the Climate and ESG Task Force to police disclosures and misconduct. The Task Force also seeks to identify gaps in investment advisers’ and fund strategies in compliance with ESG requirements.

Constructive communication

So while many agree that ESG is presently insufficient, intensifying interest means it is here to stay. It is a process, not a product. The series of stress tests created by critics should ultimately serve to accelerate development and progress sustainability. 

As part of this journey, asset managers must participate in meaningful discussion between investors and portfolio companies about financially material sustainability risks and opportunities. Contact our team to find out how our all-in-one data capturing system, SI Engage, will help you plan, track and report on activity across your portfolio companies in preparation for changes ahead.

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