ESG in the news again – what is it this time?

Anti-ESG sentiment is cropping up around the U.S. seemingly overnight – but where is it coming from? There appear to be two parties preaching an “anti-ESG” rhetoric: 

 

  1. Those who see the flaws in the ESG risk framework and are in favor of a better system of regulation (let’s call them anti-framework)  
  2. Those who dislike the regulation and favor removing ESG altogether (let’s call them anti-regulation)

This article explores the rise of anti-ESG speech, who is backing it, what the big deal is, and how you can engage as a financial activist. 


What is ESG again?


As a quick reminder, ESG is a risk framework used to assess companies’ management of Environmental, Social, and Governance issues. Based on these scores, investors can prioritize investing in companies with good ESG scores. Reporting with this framework makes companies reconsider how they approach risk management in a way that meets the challenges of this century. It is important to note that ESG does not measure environmental or social impact – that is called impact investing, which goes beyond ESG assessments. The leading ESG rating firm, MSCI, says that ESG ratings are “designed for one purpose: to measure a company’s resilience to financially material ESG risks.” So, these ratings are not fit to measure a company’s actual environmental or social impact, and impact investors use different tools. You can read about ESG and impact investing in more detail in our previous post What is Sustainable Investing? 


Who is anti-ESG, then?


On one side, we have the so-called ‘anti-regulation’ party. These people resist the growing pressure to abide by values promoted in ESG frameworks. Essentially, companies and politicians with large stakes in particular industries are annoyed that the world is becoming more aware of the responsibility corporations must take in safeguarding a just and sustainable future. At this point, corporate responsibility frameworks are inevitable to become nationally and internationally regulated. The recent backlash seems a last-ditch attempt to stall what is to come – an investment world where companies are held accountable for how they manage risk and impact. 


Often the anti-regulation sentiment is pushed by right-wing views of freedom, lack of environmental regard, and priorities of rapid financial growth. Recently, Texas outlined a list of 10 major financial companies subject to potential divestment because they “boycotted energy companies.” This included giants like BlackRock, Credit Suisse, and UBS. In simple terms, Texas is pulling its state contracts (pensions, etc.) from funds that screen for good ESG ratings and have a standard they hold companies to. Why? Texas supplies over 40% of U.S. oil, and oil companies do not fare well in ESG ratings. Of course, oil companies or regions that benefit from the oil industry are pro-oil and anti-regulation, which suggests oil is not a good investment. This is an example of anti-regulation parties pushing back on the restrictions placed upon them (or their investors) by having a poor ESG score. 

Another group is the ‘anti-ESG framework’ party. These people recognize the flaws in the ESG framework and call for better regulation. Some suggest a tighter ESG framework, while others push for impact-focused investment – the main message is that ESG is good but not enough. Economists, activists, and investors are questioning the functionality, ethicality, and compatibility of ESG investment strategies. To read about this sentiment in more detail, see our earlier post on Where Next for ESG?. Often, the anti-ESG framework party is pushing for improved regulation and criticizing the use of ESG and sustainability, more generally, as a marketing tactic. Attempts to tighten this regulation have already been seen as Morningstar Inc dropped the ESG label off about 1,200 funds after an investigation revealed the funds did not deserve the label. It is this type of action that is being pushed and is sorely needed in the world of sustainable investing. 


How am I supposed to tell the difference?


Sometimes the motive is blatantly obvious. In the case of Texas, the methodology used to develop its list of “Financial Companies that Boycott Energy Companies” screened companies based on scoring “higher than their peer group with respect to MSCI ESG Ratings” and pledges made to climate advocacy group Climate Action 100+ and the Net Zero Banking Alliance or Net Zero Asset Managers Initiative. Another example is in West Virginia, where government officials banned banks from state contracts claiming that the companies were anti-fossil fuels. It is clear here what the motive is. 


Other times it is more subtle. Last week, Morningstar released an article revealing that the 2022 proxy season saw a record number of ESG resolutions brought to the table, with over 40 of them carrying an anti-ESG message. The proposals request disclosures that advance the proposing party’s ideas– reveal a company’s skeletons, and they must improve, but that works both for and against a sustainable development agenda. One example Morningstar highlights is the General Motors disclosure request on child labor in the electric vehicle battery, which turned out to be a pro-fossil fuel argument in disguise. The party wanted to put the fossil fuel industry in a positive light, not push for better labor management in the supply chain of E.V. batteries. Fortunately, while anti-ESG (or rather anti-regulation) sentiment is on the rise, it is not being supported in the boardrooms as only 12 proposals received a decent proportion of votes. 


Why does it matter what the motive is?


So, what’s the problem if anti-ESG comes from one party or the other? Well, it dramatically determines what comes next. If it is the right-wing, anti-regulation ideas pushing the anti-ESG agenda, we could find ourselves with fewer regulations and less accountability for companies to be sustainable. Imagine a pre-ESG world where companies were not monitored or required to disclose information about their business practices to see if they were damaging the Earth or people. Suppose the anti-ESG sentiment comes from the anti-ESG framework party. In that case, we could find a push for improved ESG disclosures and a rise in alternative sustainable investment approaches like impact investing. 


What does FLIT think of anti-ESG rhetoric?


At FLIT, we see the value in ESG risk frameworks but fundamentally believe that the most effective investment to ensure your dollars make a difference in the world must be guided by impact investing. ESG encourages companies to consider the risks it poses to environmental, social, and governance issues (and thus is meant to highlight how they may improve). ESG investing has become a term to mean investing in companies that score well for ESG risk (i.e., low risk). Impact investing goes beyond this and assesses the direct impact of a company using quantitative and specific metrics. All the companies in our portfolio undergo ESG and impact investing analysis, and we firmly see the future in impact investing. 


What does it all mean for me?


Bloomberg warns that the savings of ordinary Americans are caught in a political crossfire. The article says states like Arizona, West Virginia, Florida, and Texas are part of a campaign to eradicate ESG scoring. Beyond the evident global impact that removing regulations will have, politicizing state pensions and other state funds is a serious problem. 

“Elected and appointed public officials have a duty to act in the best interests of the people they serve. Politicizing state pension funds, restricting access to investments, and impacting the financial returns of retirees, is not consistent with that duty.”  

BlackRock 

It’s hard to tell whether something is anti-regulation or anti-ESG framework, but there are still things you can do. Most importantly, wise up. Understand what ESG does and doesn’t mean. Consider why some companies don’t appreciate publicity of their poor ESG scores – does that company’s business practices align with your values? Financial activism isn’t just boycotting or investing; it’s also about staying informed and increasing your financial literacy. Go further and vote when it matters – at the moment, ESG reporting is not mandatory in the U.S., and while it is not the perfect one-stop-shop solution for sustainable investing, it is a start and better than nothing. 


What do you think about the ESG and the anti-ESG movement? Sound off in the comments below! 


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Prior to founding FLIT Invest, Alejandro worked at J.P. Morgan’s Private Bank in New York, where he oversaw and managed investments for ultra-high net worth families. Before J.P. Morgan, he was an investment analyst at Northwestern Mutual, responsible for developing comprehensive financial plans and asset allocation models. Alejandro is a CFA charterholder and former professional soccer player.

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