By Bruce Bolger
ESG Investments Continue to Grow With Promising Returns
Republican Efforts Against ESG and EU CSRD
“ESG Backlash Can Be a Clarifying Moment”
Bankers Hate the Term ESG, But It’s Full Steam Ahead
The attacks on ESG might have a positive impact: forcing companies to re-evaluate precisely how environmental, social, and governance practices enhance the organization, rather than waving ESG practices for marketing and goodwill purposes. Here’s an update on the state of the ESG debate.
To date, interest remains high in organizations and investment funds focused on ESG and stakeholder management principles, but with a much greater focus on actual impact and measurement, not another form of corporate communications. This is likely in response to pressure created by bills proposed in Congress and in legislatures around the US, including a recently introduced bill in the US House of Representatives asking the Securities and Exchange to look into the potential detrimental impact of the “anti—greenwashing” European Union Corporate Sustainability Reporting Directive on US companies.
According to a report from The Morgan Stanley Institute for Sustainable Investing, “In the first half of 2023, sustainable funds saw a median return of 6.9%, beating traditional funds’ 3.8% and reversing their underperformance in 2022...Investor demand also remained strong as sustainable funds’ assets under management reached record levels.”
In a similar vein, according to the Wall Street Journal, the anti-ESG funds have generated nowhere near the same level of interest, despite serious concerns about misleading and inconsistent ESG disclosures, citing, ironically, a lack of clarity on the criteria for inclusion in an anti-ESG fund. While the presidential candidate's Strive anti-ESG investment fund recentlyi hit the $1 billion threshold, at least some of that is the result of the interest generated by his candidacy. The European Union is seeking to address the issue of transparency through the passage of the EU Corporate Sustainability Reporting Directive that aims to reduce greenwashing in the corporate sustainability reporting of large enterprises—defined as over 250 employees and $44 million in EU sales—as well as the Sustainable Finance Disclosure Regulation, which seeks to improve the transparency related to criteria used in sustainable investment products.
Part of the reason for continued interest in ESG, according to a recent report in CNBC, may be driven by a new generation of investors with a broader definition of profitability. “Nearly two-thirds of Gen Z investors want to allocate their portfolios in a way that supports causes they care about, according to a July survey of some 4,000 current and aspiring investors by U.S. Bank. That’s compared with 59% of millennials, 45% of Gen X and 30% of boomers. And active young investors are willing to give up returns to see that goal through. The survey found more than four-fifths of Gen Z and millennials would be willing to underperform the S&P 500′s 10-year average return of 12% to ensure that the companies where they’ve invested align with their belief systems. Only 73% of Gen X and 65% of boomers said the same.”
These factors have not discouraged anti-ESG legislators. In May, according to a report by the law firm Cooley in JD Supra, “Reuters reported that, at that point, legislators had filed about 99 so-called ESG backlash bills compared with only 39 in 2022; as of April 3, they reported, ‘seven of the bills had been enacted into law, 20 were effectively dead, and 72 were still pending.’ What were they about? A number of them were designed to protect fossil fuel companies from climate-related demands of various investment funds, while others related to ‘hot-button environmental, social and governance (ESG) topics like abortion rights and firearms.’”
House Republicans are taking action as well. According to a recent article in National Law Review, “In late July 2023, House Republicans on the Financial Services Committee introduced four bills targeting various business and market activities that implicate environmental, social, and governance issues. In a statement announcing the proposals, the committee stated that ‘[t]hese measures represent the first step in Republican efforts to combat the ESG movement by restricting politically motivated, non-material disclosure mandates, reforming the proxy voting and shareholder proposal processes, increasing transparency for federal banking regulators, and limiting the Securities and Exchange Commission’s (SEC) authority to regulate shareholder proposals.’”
HR 4790 “would require the SEC to assess and issue a report on the detrimental impact of the European Union’s Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CSDDD) on US companies, consumers, investors and economy,” which are specifically intended to increase transparency in business and investments. Note, the bills have little chance of passage in the Senate, even if they get through the House.
According to a survey of 125 Conference Board member firms conducted earlier this year, “only about half of companies have experienced a backlash related to their environmental, social, and governance (ESG) strategies—and it has generally been mild in intensity. However, 43% of executives surveyed expect the backlash to increase.” About half of respondents said they have witnessed anti-ESG backlashes, but only 19% said their organization had experienced it. Over 60% expect the anti-ESG backlash to continue or increase.
As the Conference Board report points out, “Despite the negative connotations, ESG backlash can be a clarifying moment for companies. It can prompt companies to reevaluate their ESG strategy, priorities, and commitments. This requires companies to engage the board and senior management in a candid discussion of whether the company is still in on ESG and multi-stakeholder capitalism and, if so, in what ways.”
This view is echoed by Sarah Crowe, ESG and Sustainability Channel Lead and Charles Neidenbach, Lead ESG Advisor at Nasdaq, in a recent article in the Harvard Law School Forum on Corporate Governance, “How Governance Professionals Are Guiding Disclosure on ESG Topics.”
They write, “Several of the governance professionals we spoke with predict that the days of broad aspirational statements in sustainability and corporate social responsibility reports are waning as risk mitigation further influences the information shared in voluntary disclosures. The resulting approach for many organizations is to disclose the most impactful environmental and social metrics and policies sought by investors and rating organizations, and those most critically aligned with the business strategy and goals.”
They add, “Looking ahead at the remainder of the year, governance professionals shared that they expect to see corporate resourcing of sustainability, climate, and human capital management goals and priorities to help prepare for regulatory changes and align with stakeholder expectations. Governance professionals believe there remains significant low-hanging fruit toward enhancing organizations’ sustainability profiles and driving long-term value creation.”
Looking ahead, they predict, “In addition to corporate sustainability and social responsibility disclosures and the role of ratings in reputation and risk management highlighted above, governance professionals we spoke with raised valuable focus areas to build upon in 2023, including best practices to establish organizational and operational design for strong governance; define materiality in the context of ESG, and deepen board knowledge and education on ESG matters.
A recent survey by Bloomberg likewise found that “bankers hate saying ‘ESG’ but are hardwiring it into finance. The survey shows that only 18% of respondents view backlash as an obstacle, and the overwhelming majority want politicians to stop interfering.”
In the weekly JUST Capital e-mail newsletter, Martin Whittaker, CEO and Co-Founder writes, “I think companies’ ongoing efforts to address business-critical environmental and social issues are driven by the age-old desire to improve performance and create value...The opening of JUST’s Corporate Data Review this week will provide an interesting yardstick. This is the moment in our process when the companies we track see all the data we’ve collected and modeled this year relating to their performance across the 236 data points that drive our rankings. They interact with our team, seek clarification on methodological issues, submit suggestions for revisions, and in many cases direct us to new data disclosures...It’s also a barometer of how engaged companies are, both with us and the underlying issues...In 2016, for our first-ever rankings, 21 companies reviewed their data. Last year, despite growing anti-ESG and woke corporate backlash, we hit a record 350. And only last week we had over 388 registrants across nearly 300 companies for our annual preview webinar, another record – up 38% from last year. All signals point to companies becoming more interested in just leadership this year, not less.”
Alex Edmans, Professor of Finance at the London Business School and author of “Grow the Pie,” one of the books with the EEA stakeholder management advocate program, writes recently in the article, The End of ESG, “ESG is both extremely important and nothing special. It's extremely important because it's critical to long-term value, and so any academic or practitioner should take it seriously, not just those with ESG in their research interests or job title. Thus, ESG doesn't need a specialized term, as that implies it's a niche—considering long-term factors isn't ESG investing; it's investing. It's nothing special since it's no better or worse than other intangible assets that create long-term financial and social returns, such as management quality, corporate culture, and innovative capability. Companies shouldn't be praised more for improving their ESG performance than these other intangibles; investor engagement on ESG factors shouldn't be put on a pedestal compared to engagement on other value drivers. We want great companies, not just companies that are great at ESG.”
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