Deconstructing Current Backlash Against ESG Investing

The intersection of economics and environmental sustainability is expectedly contentious at the moment. For many years, businesses have functioned with the primary intent to generate profit. This ongoing quest to maximize shareholder value in a world on fire begs the question: at what cost? With record high greenhouse gas emissions, rising global temperatures and more extreme weather-related disasters, the need to address climate change is as prudent as ever. Corporate America is facing pressure to leverage its power to help facilitate the clean energy transition, but how? Enter ESG investing.

ESG itself stands for environmental, social and governance, and constitutes a set of criteria for investors to consider when making investment decisions. Its overarching goal is to gauge not just how an investment opportunity might benefit its investors, but how that company adds value to society. The three factors can be used to assess business facets such as supply chain efficiency, worker health and safety, and environmental compliance. ESG investing represents a fast-growing sector of finance, with flows into ESG funds more than doubling between 2020 and 2021 (Anonymous, 2022). This growth is, of course, not solely driven by altruistic motivations. Several studies have empirically validated positive correlations between ESG performance and financial performance (Greggwirth, 2022), and having an ESG strategy can send a positive signal to shareholders. Studies have shown that younger shareholders in particular are more inclined to invest in companies that are socially responsible. (Medland, 2015).

Yet today, ESG investing is facing considerable pushback. Politicians who resent the encroachment of environmental and social factors on investment decisions, as well as Blackrock and other prominent financial firms entrusted to maximize profits, have expressed desires to reign in ESG investing. Some have derided it as “woke capitalism”, while others feel it isn’t creating the real-world impacts it promised it would. (Kishan, 2022). To the former point, Florida Governor Ron DeSantis recently made headlines when he banned his state’s $186 billion pension fund from being screened for ESG risks. Florida is not alone; according to JDSupra, 18 states in total have proposed anti-ESG legislation, ranging from restricting to outright prohibiting state funds from subjection to ESG screening (Sorkin et al., 2022). Texas went so far as to ban government dealings with BlackRock, UBS and Credit Suisse for reportedly divesting from guns and fossil fuel companies in the pursuit of ESG (Freedman, 2022). Elon Musk even called ESG investing a “scam” after S&P Global, the manager of a popular ESG index, granted fossil fuel giant Exxon high marks while Tesla did not even make the list (Sorkin et al., 2022).

Concerns over the effectiveness of ESG criteria have also increased. McKinsey published on its website a comprehensive article explaining and responding to ESG criticisms. Some believe that in light of the war in Ukraine and grave geopolitical and economic downfalls, the importance of ESG has peaked. Another critique is that the technical components under ESG are intrinsically too difficult to measure. The scores are sometimes issued by companies using different criteria, making for a lack of conformity in ratings. Additionally, some have argued that the positive correlations between ESG and financial performance are not causative. Blackrock, a leader in sustainable finance, even declared that some climate-related shareholder proposals are too “constraining on companies and may not promote long-term shareholder value” (Blackrock, 2022). McKinsey did seem to conclude with a positive outlook on the future of ESG, asserting that with growing environmental externalities and evidence showing financial success with ESG, establishing a social license will remain important in the coming years.

It will be interesting to monitor the ongoing pushback against ESG and overall integration of societal concerns into the corporate world. Whether or not ESG presents the optimal long-term approach to sustainable finance, what is clear is its subjectivity to political tides, world conflict, and people’s collective priorities. In the coming years, we will see a struggle to reconcile ideological objections to ESG, culminating in its politicization, as well as concerns regarding its effectiveness. The initiative may now leave us with more questions than answers, but still prompts an interesting reflection on whether bettering society and restoring balance to nature have become integral parts of investment returns. Have we reached a point where maximizing profits will not win out over general societal improvement?

Edited by Ravij Lade

Works Cited

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