Support for environmental, social, and governance (ESG) principles has risen sharply in recent years. In the process, criticism of both ESG and government efforts to enshrine it into law has intensified too, including from prominent voices.
On May 18, for example, Elon Musk, boss of electric carmaker Tesla, tweeted: “ESG is an outrageous scam!” On June 30, in another setback to the ESG movement, the U.S. Supreme Court curtailed the Environmental Protection Agency’s authority to mandate reductions in carbon emissions. And on July 23, the cover of British magazine The Economist featured the title: “ESG: Three letters that won’t save the planet.”
To discuss these and other developments, the FiscalNote Executive Institute hosted a virtual roundtable, “The Politicization of ESG: What’s in Store for Responsible Investing?” in partnership with Chief Executives for Corporate Purpose (CECP) on July 28. The roundtable was moderated by Daryl Brewster — CEO at CECP — and featured Marian Macindoe, Head of ESG Stewardship at Parnassus Investments; Keir Gumbs, Chief Legal Officer at Broadridge Financial Solutions; and Isabella Bunn, Senior Advisor at Oxford Analytica.
Head of ESG Stewardship, Parnassus Investments
Chief Legal Officer, Broadridge Financial Solutions
Senior Advisor, Oxford Analytica
Below are some key insights from their discussion:
Why ESG is Controversial
- Still no consensus definition. Different uses of the term mean that advocates and critics of ESG often talk past each other. Diverse reporting standards, including disagreements about what is “material,” fuel further confusion and discord.
- ESG is no longer a fringe issue. From UN envoy and central banker Mark Carney spearheading the mobilization of $130 trillion in climate-finance commitments to the U.S. Securities and Exchange Commission’s (SEC) proposed new ESG disclosure rules, ESG has gone fully mainstream in the business world. This, in turn, has made ESG a bigger target for critics.
- ESG is no longer siloed. From legal to communications departments, few employees at large companies can avoid the topic in their day-to-day work.
- Greenwashing is widespread. As ESG grows in importance, more companies are exploiting public enthusiasm for it in unethical and, sometimes, fraudulent ways.
- Association with “woke politics.” The fact that some vocal corporate proponents of ESG also voice progressive, political stances has made ESG an easier target for some critics.
- Battle for the soul of the corporation. While public trust in government, media, and many other institutions has plummeted in recent years across the Western Hemisphere, public trust in business has stood up comparatively well. And as political gridlock persists, businesses are now viewed by many as key vehicles for achieving change — further raising the stakes on questions of how companies operate.
- Controversy about ESG is not uniform. At present, ESG is a bigger “lightning rod” in the United States that in many other European countries — especially in nations with a more deeply entrenched, stakeholder-driven business culture.
Navigating Ambiguities Around ESG
- Social focus of ESG. Some advocates emphasize the benefits of ESG for society and the planet.
- Business focus of ESG. Other advocates emphasize the benefits of ESG for companies and long-term business value creation.
- Focus on value. Whether your focus is social or business, treating ESG as a framework to create long-term, sustainable, widely shared value is a sensible strategy.
- ESG isn’t always a win-win. Because stakeholders’ interests sometimes diverge, tradeoffs are unavoidable. In such cases, which stakeholders should receive priority? And who should make the decision — the owners of the company, its managers, legislators, or some other group?
Future of ESG
- Controversy will intensify in the short term. A growing number of politicians sense that support — and especially disdain for — ESG can help mobilize certain voters. ESG is therefore likely to become a more important issue in elections.
- Generational shift in the long term. Younger employees, consumers, and investors tend to view ESG more favorably than older individuals, many of whom grew up at a time when the shareholder-focused notion of the corporation was ascendant. Such changing demographics in the years ahead make it more likely that the ESG label will ultimately disappear and will, instead, simply be fundamentally fused into how companies do business.