ESG: The Empire Strikes Back

David Keto, SRI Group

In a sign that responsible investment is having a real impact, articles recently appearing in Bloomberg, New York Times, Washington Post, and other outlets reported on a concerted effort by Republicans and their business backers to politicize investing guided by environmental, social, and governance (ESG) considerations. For example, states with strong fossil fuel industries are taking action to deny business to asset managers and advisors that apply ESG factors, and in particular those that disfavor fossil fuel companies in investing. Social considerations, including treatment of workers and collective bargaining rights, are targets of partisan attacks. Responsible investment is derided as “woke capitalism.” None other than Elon Musk has recently tweeted that ESG is a “scam.” Mr. Musk has long fought a unionization drive at the California Tesla factory, which has suffered higher rates of worker injuries.

Various corporate lobbies are weighing in against the prospect of the SEC pushing for ESG rules and requiring climate disclosures, which the Expresso has been following. The fossil fuel industry has been concerned about ESG investing for some time, and Exxon was stung last year by the successful Engine #1 campaign, with the support of pension plans, to win three independent board seats for members who vowed to push the company to address climate concerns.

The US Chamber of Commerce worked hard behind the scenes during the Trump Administration to push back against ESG. For example, at the direction of the White House, the U.S. Department of Labor adopted regulations intended to chill ESG investing by retirement plans despite nearly unanimous opposition to the regulations from the financial industry. The Biden Administration has issued replacement regulations in draft form supportive overall of ESG investing by retirement plans.

Although the politicization of responsible investment is not good news, it was inevitable now that responsible investment really matters. Responsible investing is now mainstream. Proponents of responsible investment can take heart that the increasingly shrill and partisan opposition is evidence that ESG strategies are having an impact, not only in making it more difficult for bad corporate actors to raise capital, but also by elevating the issue of responsible corporate behavior in public conversations. These conversations affect not only the investment world, but also companies’ ability to attract and retain talent and to manage their reputations with their customers.

Responsible investment is sometimes pooh-poohed as performative, without having a real impact on businesses and the economy. Don’t believe it. The opponents of responsible investment certainly don’t.

Responsible investing is now mainstream. While there’s always room for certainty, more clarity in regulations, and guardrails against greenwashing, this horse left the barn a long time ago.