As the ESG backlash escalated this past year, companies have often felt caught between Scylla and Charybdis, struggling to navigate between the company's commitment to ESG issues that the company believes will contribute to its long-term performance and benefit investors and other stakeholders, and the opposition that has arisen to the corporate focus on ESG, particularly social and environmental matters. The Conference Board, however, suggests that we look at it differently: "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," providing an "opportunity to clarify their ESG strategy and communications." In a recent TCB survey, half the companies indicated that they had experienced some form of ESG backlash, whether against their industry (26%), more generally (e.g., their state) (20%) or against the company specifically (18%). In addition, 61% thought that ESG backlash would "stay the same or increase over the next two years." TCB posits that the increase will be driven largely by "emotionally charged topics, such as hot-button social issues and the transition to more sustainable forms of energy that raises fear of job losses." With that in mind, this paper from TCB attempts to provide some analysis of the nature of ESG backlash and guidance on how companies can address it.
Background
By far, the paper reports, based on the recent survey, the industry groups most targeted are financial services and insurance, but other corporate issuers indicated concern that they might be targeted next. Most backlash has arisen in connection with companies' "E" and "S" initiatives, such as DEI (diversity, equity and inclusion), particularly where companies have taken public stands, and environmental issues that may threaten jobs or "established ways of life." These types of initiatives, TCB suggests, may provoke emotional reactions. Opposition to some "G" issues, TCB observes, has always existed, but is less emotionally driven, largely reflecting different views on the purpose of corporations in society or the role of the board.
According to the survey, the most significant sources for ESG backlash were state policymakers and candidates (31%) and federal policymakers and candidates (22%), reflecting the "broader challenging political environment for US businesses, characterized by polarization, volatility, anticorporate sentiment and denunciations of 'woke' capitalism." To illustrate, the paper makes reference to a March 2023 joint statement from a group of 19 governors announcing that they are seeking to "[ensure] corporations are focused on maximizing shareholder value rather than the proliferation of woke ideology." Similarly, as reported in the WSJ, a July letter from a group of state attorneys general warned Fortune 100 companies "against race-based preferences in hiring, promotions and contracting after the Supreme Court's recent decision finding affirmative action unconstitutional." Although, most recently, state-level anti-ESG actions have been focused on asset managers and financial institutions, the paper reports that companies identified as their greatest risk the potential for codification of anti-ESG policies, particularly the risk that "divergent ESG approaches at the state level will result in dividing the US into 'red' and 'blue' regulatory regimes and economies, making it harder for companies to plan and operate across the country."
SideBar
As noted above, state and local governments—wielding the levers of government—have begun to enact legislation or take executive action that targets companies that express public positions on sociopolitical issues or conduct their businesses in a manner disfavored by the government in power. As described by Bloomberg, while "companies usually faced mainly reputational damage for their social actions, politicians are increasingly eager to craft legislation that can be used as a cudgel against businesses that don't share their social views." And many of these actions are aimed, not just at expressed political positions, but rather at environmental and social measures that companies may view as strictly responsive to investor or employee concerns, shareholder proposals, current or anticipated governmental regulation, identified business risks or even business opportunities. According to Reuters, some "states have unleashed a policy push to punish Wall Street for taking stances on gun control, climate change, diversity and other social issues, in a warning for companies that have waded in to fractious social debates." Some state officials accuse the targeted companies of "using the power of their capital to push their ideas and ideology down onto the rest of us." These new prohibitions can create serious impediments to companies' ability to conduct state business, implicating billions of dollars.
In May, 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." (See this PubCo post.)
Some of these bill may meet resistance. As discussed in a business journal article from the Wharton School, academic research looked at the financial impact in one state of legislation aimed at prohibiting local jurisdictions from contracting with banks that had adopted policies against guns and fossil fuels. It turned out that the legislation may not necessarily have worked in the state's economic best interest. As a result of the legislation, a number of major underwriters exited the state. By decreasing competition, the legislation increased the costs of borrowing, the research found. The research estimated that, for the "first eight months following effectiveness of the legislation, the cities in that state will pay an additional $303 million to $532 million in interest on $32 billion in bonds." In this case, as it turned out, the law had "so many loopholes and exceptions" that, when the state began to ask financial institutions to describe their climate policies, several banks attempting to re-enter the market were able to say that their policies were in compliance. For example, one loophole noted by NPR allowed companies that wanted to continue to work in that state to "still avoid investing in fossil fuels as long as they are doing so for strictly financial, rather than ethical or environmental, reasons." (See also this PubCo post.)
And, as discussed by NPR, some commentators are skeptical about this type of legislation altogether, viewing these actions by states as largely symbolic and unlikely to succeed. For example, with regard to the ESG legislation aimed at financial firms, they point to "gaping loopholes in the legislation. They say that the climate risks to the financial system are so huge that there's no real way to stop financial firms from pricing them in—and going greener in the process." According to a mutual fund manager quoted by NPR, "for her firm, being listed as a boycotted entity might not be such a bad thing. 'I don't think this is going to affect demand at all,' she says. 'In fact it might spur more people to realize that they can invest fossil fuel free.'" (See this PubCo post.)
However, the survey found that backlash can be common within companies too. Boards and management may object to what they perceive as overly burdensome regulation and the potential distraction of ESG away from core business issues. Companies reported that employees (20%) were also a source of backlash. While many employees may expect their companies to take stands on certain social issues, other employees may have opposing views and "may push back against stances or initiatives that they disagree with— including through litigation." Over the next two years, the survey showed, "companies are also concerned about increasing backlash from consumers, business customers, institutional investors, and local policymakers."
One effect of the anti-ESG movement has been that businesses have started to keep quiet about, or at least lower the volume on, their ESG initiatives—a phenomenon so common it now has a name: "greenhushing." Axios notes, for example, that Larry Fink's recent letter to BlackRock investors didn't even mention ESG, and other companies appear to have cut back on some of their climate goals. However, a January TCB survey of over 1,100 C-suite executives found that "most CEOs globally and in the US are not curtailing their sustainability-related investments due to ESG backlash." Only about 17% in the U.S. were "proactively refining their priorities or realigning their focus to ensure their sustainability efforts remain effective and impactful."
TCB also found that the number of anti-ESG shareholder proposals has been rising, including an increase from 53 proposals in 2022 to 91 proposals in 2023. Many of these proposals addressed social issues, such as human rights and civil rights audits, and political topics, such as "challenging perceived suppression of 'disfavored speech' on social media platforms or calling for audits into the impact of DEI policies on religious and political freedoms." But so far, these proposals have received a cool reception, "largely underperform[ing] their pro-ESG counterparts." According to the Proxy Preview 2023 from the Sustainable Investments Institute, As You Sow and Proxy Impact, these proposals garnered a favorable vote of less than 4% on average. (See this PubCo post.)
Strategies
In the paper, TCB offers its advice for the best ways for companies to approach ESG backlash:
- Understand the motivation of the backlash. The paper observes that there are different motivations behind the umbrella term, "ESG backlash," and these may be important to analyze in developing an appropriate response. These motivations include "healthy skepticism that questions the effectiveness of ESG initiatives," such as underperformance of ESG funds relative to the broader market in 2022, the inclusion in the fund of companies with poor environmental and social records, failure to deliver on environmental and social goals, higher fees or the unreliability of ESG ratings; "philosophical opposition" that challenges the emphasis on ESG as opposed to seeking to increase shareholder value in the context of operating and financial performance, or opposition to regulation or ESG practices; and "opportunistic opposition that arises when individuals or entities use ESG backlash to further their own personal or political fortunes," such as depicting ESG as elitist or woke or "conflating ESG with taking stands on social issues." The paper advises that, although "ESG backlash often has an emotional component, companies should objectively assess the legitimate empirical and philosophical objections rather than react emotionally to the more opportunistic aspects of ESG opposition."
- Capitalize on backlash to provide a "clarifying moment." ESG backlash, TCB suggests, just might induce companies to reevaluate their ESG strategies, priorities, and commitments through "candid discussions between the CEO, board, and senior management" designed "to determine if the company is still committed to its ESG strategy and multi-stakeholder capitalism, and if so, how it will move forward on its commitment." Companies should focus, TCB advises, on empirical evidence and objective analysis. To that end, TCB suggests that companies gather and analyze information about the "response of consumers and employees to the company's stances on social issues, and ensure that their boards have a more complete picture of the expectations, interests, and relationships with stakeholders." Companies can also revisit their materiality analyses to reassess what is important to the company and its stakeholders, taking into account both pro- and anti-ESG perspectives among stakeholders. In this way, "companies have an opportunity to strengthen their ESG initiatives. They can review their existing practices, identify areas for improvement, and align their strategies with their core values and long-term goals. This process enables companies to demonstrate their commitment to sustainability, responsible governance, and societal impact in a more meaningful and transparent manner."
- Align sustainability goals with business strategy. TCB maintains that the most effective way to address backlash is "to ensure the company's ESG and sustainability goals align with core business strategy, are supported by empirical evidence, and serve the long-term welfare of the company itself as well as those of stakeholders and society." In the survey, 63% of companies that experienced backlash were increasing their focus on the link between ESG and core business/shareholder value. Communications strategies might be revisited to more clearly articulate the "business case for ESG integration and how it drives value creation and shareholder returns," based perhaps on empirical research showing the benefits of ESG "in the form of higher profits and stock return, a lower cost of capital, and better corporate reputation scores."
- Engage with policymakers. Given that policymakers have been, and will likely continue to be, significant sources for ESG backlash, TCB recommends that companies "proactively engage with key policymakers, out of the limelight, to explain their ESG strategies and how they serve the interests of the business and constituents." The survey showed that, among companies that have experienced backlash, few, only 23%, had actively engaged with government officials over their ESG policies. Companies may want to allocate more resources to tracking policy developments to facilitate engagement. Through direct one-on-one interaction with influential state policymakers, companies may be able to promote a "deeper understanding of their intentions, build relationships based on trust and collaboration, and potentially influence the direction of state policies."
- Reconsider "greenhushing." TCB suggests that companies should be cautious about withdrawing from the public discussion of ESG. While a significant proportion of companies have cut back on external communications about sustainability, TCB warns that a pullback "runs the risk of forfeiting the opportunity of telling the company's story to stakeholders who are focusing on ESG for the first time." Rather than retreating, it may be useful to "articulate the company's history of social and environmental responsibility, which can reinforce the message that the company has not suddenly become 'woke,' but rather that serving multiple stakeholders has long gone together with profitable performance."
- Avoid dramatic shifts in communications. If economic, business or other considerations prompt a company to reconsider its sustainability investments, TCB emphasizes the importance of clearly communicating the rationale behind it "to avoid the perception of caving into backlash." To preclude the impression that the company is capitulating to political pressure or that its commitment to ESG is superficial, TCB advises that companies "avoid dramatic shifts in how they talk about ESG issues," and provide "clear explanations that articulate the underlying rationale behind the shift to mitigate potential skepticism."
- Revisit terminology. One approach taken by almost half of companies surveyed that experienced backlash was to simply shift from talking about "ESG" to "sustainability," which might be less tainted and perhaps "better understood by employees, customers, and the public." To illustrate, the paper points to the substantial reduction between 2019 and 2022 in the use of terms such as "ESG" and "purpose" in the BlackRock CEO's annual letter. TCB suggests that "concepts such as clean air, clean water, equal economic opportunity, and quality of life may be even more effective than terms such as sustainability."
- Consider placing ESG in its historic context. While companies often want to present ESG initiatives as something new and responsive to stakeholder concerns, TCB suggests that companies may actually "benefit from more explicitly tying their ESG initiatives to the firm's longstanding commitments to responsible governance and business practices." In creating and communicating its ESG strategy, TCB advises, a company should "begin not with what is new but with the company's existing strengths and capabilities. Building on the company's longstanding record is a useful way of ensuring that ESG initiatives are tied to the company's core strategic strengths. Such an approach enables employees and other stakeholders to view those initiatives as something familiar and not a radical rejection of the past and dispels notions that the firm's ESG commitments are a form of faddish 'woke' capitalism." Companies may also be able to place ESG initiatives in the context of a historic commitment by the company to corporate responsibility.
- Consider joining industry groups, but beware of antitrust risk. TCB observes that trade associations and industry groups can be useful for "making the broader business case to policymakers," and suggests that, to amplify their voices, companies may want to join and actively participate in these groups to challenge specific anti-ESG legislation, including enlisting small businesses as allies. Importantly, however, companies should keep in mind the risk of potential antitrust violations. See, for example, this press release from Republicans on the House Judiciary Committee entitled "Woke Companies Pursuing ESG Policies May Violate Antitrust Law" regarding a probe into whether Climate Action 100+ is violating the antitrust laws, and this letter and this letter from a number of state AGs contending that asset managers' coordinated conduct with other financial institutions on climate matters raised antitrust concerns. TCB recommends that companies "ensure that their collaborations do not compromise the quality of goods or services, reduce output, or lead to price increases that harm consumers or restrict competition. It is crucial to maintain a clear and demonstrable procompetitive rationale behind the collaboration, aligning it with broader industry objectives or the pursuit of common sustainability goals."
- Keep a balanced perspective on ESG backlash. Finally, TCB advocates that companies "keep backlash in perspective and remember the reasons why they focused on ESG in the first place, which are likely to remain valid." These reasons include "demand from investors for sustainable investment options, growing consumer preferences for sustainable products and services, the importance of purpose-driven work for attracting and retaining talent, the perceived importance of ESG factors in risk management, and the increasing implementation of ESG-related regulations and reporting requirements by governments and regulatory bodies."
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