News analysis
Is ESG a political issue?
Is ESG a political issue? Because it certainly behaves like one in some parts of the world. Let’s examine it in a little more detail.
Rightly or wrongly, ESG (environment, social and governance) has become a political issue. Proponents never intended it to end like this, but here we are.
Why? Because of its impact on the way people spend money. ESG is a new take on business and investment strategies. In general, it aligns them with goals that the mainstream 21st Century stakeholder would consider top priorities.
As a result, it’s a hot and often controversial topic for boards, shareholders, and politicians who represent their interests.
So, is ESG a political issue? In many cases, yes. The real question is whether it should be a political issue. This is where it gets more complex.
What’s the context?
ESG continues to divide, puzzle and frustrate the leaders of big companies.
Boards and executives know that the movement increasingly reflects the desires of stakeholders – i.e. “do no harm to the planet, its people, or your own governance” – but integrating that into company strategy takes time and money – something many shareholders are unwilling to part with so easily.
It has caused friction as companies like Shell or Wreeen Buffett’s conglomerate Berkshire Hathaway. Here, activists want bold moves towards ESG, while corporate leaders are reluctant.
The commentary around such disagreements will often discuss how much ESG should be allowed to dominate company strategy, especially if short-term financial gain is threatened.
“Caught in the crossfire of culture wars”
“I’ve been shocked by the backlash [against ESG],” said the Corporate Governance Institute’s CEO, David Duffy.
“And unfortunately, it seems that ESG is now firms caught in the crossfire of culture wars.”
The backlash he refers to is more prominent in some countries than others. It has a serious foothold in the United States, where prominent right-wing politicians reject the concept outright and pursue legislation to ensure it doesn’t get a foothold.
They include Texas governor Greg Abbott, Florida governor, and potential 2024 presidential candidate Ron DeSantis.
Why has ESG been caught up in the culture wars?
As it gained momentum, some experts began to see ESG as a directive for investors – telling them what they could spend their money on and what they couldn’t.
Simultaneously, critics of ESG claimed the movement would hold shareholders back from maximum return on investment because non-ESG-related projects would give higher profits.
Add the above together, and you get a scenario that alarmed many on the fiscal right. One of their greatest champions is a free market, with minimal regulation or interference from politics. They see ESG as an attack on this principle.
From there, the movement became one of many fronts in the broader culture between the left and right, characterised by hostile rhetoric and little compromise, especially in more polarised nations like the US.
What should ESG be, if not a political issue?
A tool, says Duffy.
“ESG is a crucial tool for investors to evaluate a company’s long-term viability,” he explained.
“By considering the company’s environmental impact, social responsibilities, and governance structure, investors can identify potential risks that may not be apparent in a company’s financial statements.”
He added that ESG enabled a self-analysis within companies, letting them see where to improve operations, expose weak governance, and protect themselves from lawsuits.