This week marks the 55th anniversary of Earth Day, a celebration that underscores the ongoing challenge of climate change, largely driven by the industrial economy’s dependence on fossil fuels. To decarbonize, governments have implemented various mandatory policies, while businesses are increasingly adopting voluntary approaches. The most well-known business initiative in this context is ESG (Environmental-Social-Governance), a metric designed to assess a company’s overall performance beyond just profitability.
The concept behind decarbonization is that significant changes are needed in how businesses operate. These policies, whether enforced by law or chosen voluntarily, often result in short-term financial costs for companies, but contribute to the greater global benefit of reducing climate change. If companies focus solely on maximizing short-term profits, they may be less inclined to engage in decarbonization. ESG plays a pivotal role by acknowledging companies for their environmental efforts. Additionally, the social and governance components of ESG encourage managers to consider the interests of all stakeholders, not just shareholders. This shift in focus is substantial, as financial markets typically prioritize profit
ESG has become a surprising point of contention in American politics. Historically, conservatives have been against government regulations and in favor of voluntary business self-regulation. However, recent events suggest that conservatives are now pushing back against voluntary business self-regulation through ESG, criticizing it as a concession to liberal pressure and “woke” ideologies. From their perspective, ESG leads businesses to prioritize liberal causes over profit.
The ESG debate becomes irrelevant if it aligns with corporate profit goals. Yet, what if it doesn’t? This question is hotly debated among scholars. How would businesses react if ESG initiatives conflicted with their profit objectives? Even if firms can resist the stock market’s demand for quick returns, they could face legal issues for not fulfilling their fiduciary duty to shareholders. This legal argument is being used by conservatives to challenge ESG on both legal and political fronts.
ESG and Cultural Wars
Larry Fink, the CEO of BlackRock, is known as a leading advocate for ESG (Environmental-Social-Governance). In 2012, he started writing his “Dear CEO” letters, but it wasn’t until 2016 that he first mentioned ESG. According to Google Trends, ESG gained popularity in the U.S. in 2019. It became a major topic at elite events like the World Economic Forum, with financial firms launching ESG-focused funds and business schools offering ESG courses.
Interest in ESG peaked in 2023, but its popularity has since declined. A Wall Street Journal article recently titled “The Latest Dirty Word in Corporate America: ESG” reflects this downturn. What caused ESG’s relatively brief period of prominence? Two factors stand out: cultural wars and the Ukraine crisis.
ESG represents a vision of stakeholder capitalism. Fink describes stakeholder capitalism as focusing on mutually beneficial relationships between a company and its employees, customers, suppliers, and communities. However, this approach is losing support. For conservatives, stakeholder capitalism is seen as a guise for liberal corporate managers to push their political agendas. These managers can avoid accountability by finding some “stakeholder” to justify their policies. Unlike the stock market, which holds companies accountable for profits, stakeholder capitalism can allow managers to avoid this kind of scrutiny.
Companies have a fiduciary duty to maximize shareholders’ wealth. Using this legal principle, several U.S. state Attorneys General have filed lawsuits against financial companies that implement ESG. The U.S. House of Representatives Judiciary Committee has subpoenaed BlackRock and State Street Global Advisors to examine if they are conspiring to promote ESG. In this politically charged atmosphere, many financial investors are distancing themselves from ESG funds.
ESG and the Ukraine War
Fossil fuel supporters view ESG as an implicit climate standard, especially given the focus on energy security and price inflation following the Ukraine war. This shift has provided a political opening for them to challenge ESG.
The Ukraine war has reshaped the political and economic landscape for the oil and gas sector. With energy prices becoming a critical concern worldwide, governments are prioritizing low gas prices. Both Democratic and Republican Presidents have supported the U.S. becoming the world’s top oil producer. Fracking has made the U.S. the leading producer of natural gas, and the country has significantly increased its natural gas exports, building a massive new LNG pipeline infrastructure. This has resulted in booming profits for oil and gas companies. Given these lucrative opportunities, financial firms find it challenging to justify not investing in oil and gas companies, especially since they have a fiduciary duty to maximize shareholder returns.
The changing political climate has emboldened the oil and gas industry to push back against ESG and climate-related initiatives. Exxon Mobil, for instance, has sued investors to prevent a vote on a climate proposal at its shareholder meeting. Larry Fink, who was once a vocal advocate for decarbonization, has shifted to a more pragmatic approach, supporting a mix of renewables and fossil fuels. At a recent S&P Global Energy Conference, Saudi Aramco’s CEO, Amin Nasser, stated that fossil fuel demand is expected to continue growing, dismissing the idea of a near-future phase-out of oil and gas as a “fantasy.”
Was ESG a fad then?
Fads often surge in popularity and then quickly fade, with their appeal not necessarily grounded in reality. However, ESG wasn’t a fad, as its underlying concepts address a broader issue: the social responsibility of businesses.
Climate change is a real threat, and capitalism itself is at risk due to public dissatisfaction with growing income inequality and decreasing living standards. This raises crucial questions about a company’s social purpose. Back in the 1970s, Milton Friedman stated that the “Social Responsibility of Business is to increase its profits.” From Friedman’s viewpoint, corporate social responsibility (CSR) is akin to charity. He argued that firms aren’t in the business of charity and that shareholders, as the firm’s owners, should individually decide how to use their profits.
However, this perspective has led to social and political turmoil, weakening firms’ social license to operate. The CSR movement emerged to restore this license, with Bowen’s book, “Social Responsibilities of the Businessman,” providing the foundational argument. In the 1980s, Freeman introduced the concept of stakeholder capitalism, which evolved through several versions like Triple Bottom Line and the United Nations Global Compact. ESG can be seen as the latest iteration designed to address contemporary needs. Yet, cultural conflicts and the Ukraine war have created a challenging environment for companies to adopt ESG.
In summary, conservatives view ESG as “woke capitalism” and are using government power to target companies that self-regulate. But the climate crisis is worsening, and the fundamental question about a firm’s social role remains unresolved. It is unclear if ESG will be rebranded under a new term, allowing companies to navigate the changing political and social landscape while addressing climate change.
Tran Dung/ATES Global
Source: Forbes
