Many believe the conservative fight against “woke” ESG investing will spell the end of responsible corporate governance; perhaps this only the next stage in its evolution.
With the rise of lawsuits targeting shareholder activism, companies have begun to remove terms like “ESG” and “DEI” from their lexicons. Do investor withdrawals of billions of dollars from funds that invest in companies with environmental, social and governance principles, and congressional republicans branding ESG-focused organizations “cartels” and issuing subpoenas to investment firms that offer environmentally-friendly funds spell the end of responsible governance as we know it?
Perhaps, but most likely, this is just the next iteration of ESG, CSR, and a myriad of other acronyms denoting responsible corporate practices.
What is Corporate Governance?
Although corporate governance has many roots, it’s rise to prominence really began in the 1980’s, as states increasingly moved towards privatization and deregulation (education, security, municipal services, etc.), strengthening the role of nonstate actors across the board. New technologies eased communications, population flows, and the exchange of ideas (both for better and worse). The end of the Cold War encouraged liberal economics (capitalism) and democratic systems, leading to more investment in human rights and other issues of global concern. The dynamics of global governance began to evolve; both tensions and synergies among sources of governing authority began to emerge.
The International Organization for Standardization (“ISO”), which has existed in various forms since 1906, and in its current structure since 1946 and the post-WWII reconstruction era, is one of the best-known examples of a widely accepted NGO that started incorporating responsible governance practices in the 1980s. The ISO 14001 is the most widely adopted voluntary environmental standard in the world and gives stakeholders information about firms’ environmental practices and allows them to support or invest in those whose values align with their own. Clearly, there is a demand for this type of governance, because “as of 2005, 110,000 facilities from 138 countries [had] received ISO 14001 certification.”
Economists like Edward Freeman have been preaching a culture of challenge and pushback in “culturally appropriate ways" since the 80s, suggesting that consumers and other stakeholders can and should expect more from companies and coworkers. In other words, it's up to society to push back and demand what we want from companies, including responsible practices.
And what is society demanding, you ask?
Economists like Kate Raworth and Mariana Mazzucato point to humanity’s overuse of resources and simultaneous failure to meet the needs of the populace of the world. Experts across various sectors are beginning to recognize the distinction between value creation and extraction; that is, people are looking more at which industries and firms are actually productive, and which are simply accumulating wealth without reinvesting it in ways that will lead to growth and technological development. Neoclassical free trade models of economic development and industrialization which suggest that a rising tide lifts all boats is not necessarily accurate without proactive reinvestment into innovation and equal distribution. As a result, efforts to be regenerative and distributive by design, and to focus on value creation- which might not necessarily equate to profit maximization- are gaining recognition.
So, what is the current backlash about?
ESG has been getting some serious side-eye from critics, in recent years. Many concerns revolve around the lack of standardization and insufficient oversight.
Then there's the argument that ESG investing might actually hurt your wallet. Many critics argue that stakeholder capitalism violates fiduciary laws, and companies should focus on making profits for their shareholders, and leave sustainability and human rights policy-making to the government.
Proponents of ESG investing, however, argue that considering environmental, social, and governance factors can in fact help investors manage risk better and find new ways to make money. For example, companies like Noranda show us how stakeholder support is essential to shareholder profit.
ESG investing isn't perfect, but instead of throwing the baby out with the bathwater, maybe we need to roll up our sleeves and work on making it better. Rather than viewing ESG as a panacea, investors should approach it as one tool among many for evaluating companies and managing risk. At the end of the day, investing—whether in ESG or not—is not one-size-fits-all. It's about finding the right balance between making money and making a difference.
The backlash against ESG reflects the inherent challenges and complexities of sustainable investing. While criticisms are valid and warrant attention, they should not overshadow the potential benefits of integrating environmental, social, and governance factors into investment decisions. By addressing concerns about transparency, accountability, and standardization, the industry can enhance its credibility and effectiveness, paving the way for a more sustainable and responsible approach to investing in the future.
