The Polarization of ESG Investing: How "Woke" Became a Dirty Word

Progress by government and corporates to advance ESG outcomes, largely climate goals and improving equity, access and diversity within our economies is under threat. The threat stems from a political polarization of ESG initiatives being rebuffed as a woke-agenda topic and legal challenges of ESG investment policies and shareholder proposals. How can Canada and its corporations hold the course, continue to make progress towards sustainable economic systems and not lose traction on the ever important business essential that is sustainability??

Uncertainty might just be the most complex state an organization has to respond to. Risk is not this, you can analyze risk, determine its materiality and mitigate it. Creating an environment where uncertainty is injected into boardrooms relating to the value of developing and implementing an ESG strategy can stifle decision-making or undermine existing efforts. Worst of all it could delay action or reduce investment towards ESG initiatives and overall corporate transitions aimed at redefining business strategies in a carbon-constrained economy.?

Any reality where corporate action into ESG is not rewarded in the market or it loses its edge as a competitive advantage is detrimental. Just ask the Thwaites Glacier or New Zealand. Worse would be a reality where companies are penalized for their efforts as a result of political actors driving investment policies away from companies with strong ESG performance.? This could potentially stall corporations in their efforts. Corps may see an “out” to not advance sustainability and ESG initiatives within their organizations, as there are still those hoping that ESG will go away. For those that have taken action, this could reduce the urgency and importance of these actions. Thankfully, CEO’s of some of the most powerful organizations don't care if ESG has become a toxic phrase among some, but for the sake of progress as a human species with a habitable planet, we need both large and small moving in the same direction. Private sector leadership is more important than ever.

For a moment let me preach to my echo-chamber. The investment by corporations into sustainability has proven to improve resilience and efficiency across operations, supply chains, and capital allocation programs, attract and retain talent, allow for the effective management of human capital, increase investment and improve reputation; overall leading to profitable, resilient and sustainable business in the long term. A robust sustainability strategy, integrated into an organization’s operating model to guide decision making and bring cohesion to cross-functional teams, resulting in strong ESG performance has been proven to improve the financial performance of companies, relative to their peers. The business case for sustainability has always been complex. Thankfully, with changing consumer preferences for sustainable goods and services across value chains allowing companies to charge green premiums, actors across supply chains reporting on others scope emissions within their own disclosures, government grants and tax relief programs, and opportunities to invest in clean technology or biodiversity projects that can generate revenue through verified credits, the returns become clearer to discern and integrate into traditional ROI models.? This is the business case for sustainability, and evidence continues to mount in favor of this.??

While capital markets and investors have long been a strong driver for corporations to achieve ESG ambitions, increasing awareness and expectation around ESG performance is becoming standard as stakeholders, consumers and employees ideals and preferences change. A recent article in Forbes stated, “Regardless of whether you are of the red or blue political stripe, public opinion, private, human and government capital and consumer interest are all trending towards “green” or “sustainable” products and investments in the long run.” Millennials and Gen Z are re-shaping electorates and in this, changing public opinion and expectations on action towards climate change and air quality. The article went onto explain that over the next two decades, these generations will also be the recipient of $73 trillion in wealth transfers, and young people want their investments to reflect their values. Efforts are turning towards the development of investment analysis and frameworks that can both identify a company that can both do good and do well. Certainly there are issues to be addressed to reduce scrutiny around ESG, including greenwashing and improved alignment across ratings agencies, but changing public opinions, and voter ideals, are cementing ESG strategies as a core component of business today.

This rise in ESG awareness and importance is coming from several actors and influencers. One can look to increasing government requirements on ESG disclosures and reporting, directors and officers being held liable for failed climate strategies, and that climate change itself is now the main driver behind responsible investment. We are also witness to the physical evidence. Daily in the media, highlights of the damaging effects from climate change globally on people, economic systems, biodiversity, property, food systems and the stability of supply chains. Considering this, sustainability strategies which address material risks and are resilient and adaptable in the face of ever changing macro-threats certainly cannot be labelled a passing fad, but would seem rather like a framework for progress. Or at least, one might think.

As of late, I have been following commentary around ESG investing as scrutiny and legal challenges mount through coordinated efforts to counteract ESG’s increasing prevalence in leading asset management firm’s investment policies. Red States, Texas and Florida for example, take issue with Biden’s climate and social policies and are feverishly leading the charge and blasting corporate ESG initiatives as “woke”.? Given this was not the first time I had seen the term being used by politicians' and others' in a negative context, I wanted to understand this argument of dissent, because I was now seeing numerous articles related to ESG investing with a concerning undertone, the dismissal of ESG investing as a wokeness that needs to be challenged. Being woke refers to one being aware of social and political issues, specifically the concepts of social justice, racial equality and progressive politics. There are parallels of a woke agenda, especially one focused on advancing social performance of a country or organization, to corporate ESG strategies. It became evident quickly that the use of the term woke in these cases, was not meant in a favorable light.

To the South of us, several congressional inquiries are being launched around ESG, its legality and concern that a corporation's participation in ESG initiatives is in violation of state and federal laws, fiduciary duty and is negatively impacting shareholders. Bloomberg Law reported that in January, attorney generals from 21 states challenged voting advice to shareholders from firms that considered proposals on ESG matters like climate change and board diversity, stating that the advice provided, “isn't material and may threaten economic value of their states investments and pensions”. This flies in the face of foundational ESG thinking, whereby ESG criteria and performance provide a mechanism for investors to evaluate the financial risk and exposure of an organization in how it identifies, analyzes, quantifies and mitigates the risks inherent in the nature of their business, industry and their own corporate practices. ESG allows investors to make informed investment and divestment decisions and offer risk adjusted returns to their clients. These legal actions create just another complexity for organizations to consider when making human and financial investment decisions around their own ESG strategies. Call it increased noise in an already very loud and chaotic room, especially where executives are already trying to navigate political and ESG influences while staying focused on their core operations and managing numerous other challenges.?

These arguments are indeed important for Canadians to watch, especially when we look at our own emissions intensive sectors and their operation across all provinces. The crux of the argument is that billions of pension dollars, as assets of the State, under the direction of ESG focused asset managers are being divested from the emissions intensive industries within those states, particularly in the energy sector. Vocal concern from the attorney generals of Arkansas and Texas, commenting that ESG hinders a company’s ability to operate efficiently, innovate, would destroy the commonwealth's competitive advantage, thus crippling the economy and "that consumers and investors are being hurt by the woke ESG movement’s obsession with radical social change and willingness to ignore the law”. What underlies this, are political ambitions to see investment into traditional energy projects, rather than those aligned within an energy transition and diversification strategy, overlaid by a corporate ESG strategy. Vis-à-vis business as usual.?

This short term thinking to protect continued investment into emissions intensive industries and into organization’s that denounce investment into human rights, safety, fair wages, and inclusive workplaces as unnecessary may appease a small number in the short term, but the long term impact will be substantial. Public opinion is transforming, companies that embrace energy transition and improving their relationships with employees and other stakeholders are seeing value from their actions. Canada can serve as a model for the future, where several energy based companies have developed transition strategies and committed to continued optimization and decarbonization of their core business. Keeping jobs in place and energy prices low. Waiting on the sidelines while this debate plays out could lead some sectors to find themselves so far behind, that when the political winds shift, or they are unable to retrain workers or their product becomes uncompetitive due to its' laggard performance in emissions reduction, no amount of focus and investment into an internal ESG strategy could turn the ship around. If this cohort has its way here, one could make an argument that this is putting state pension funds even further at risk and potentially stagnating entire economies.?

The matter begs inquiry, too, into the alignment between political agendas and the constituents represented. Fortune published JUST Capital’s survey results, which highlighted American’s resounding alignment with ESG initiatives as something they want, noting that companies are seeing a real competitive edge when they follow the public agenda versus agendas of politicians. These companies are choosing to invest into human capital, climate and sustainability solutions, DEI, and responding to the needs of their customers and the communities where they operate. Martin Whittaker, CEO of Just Capital, offers a salient perspective, “this isn't about politics or adhering to some ESG label or doctrine. It’s about businesses and markets driving competition to build a better future for all of us. And that starts with the American Public”. I myself have questioned Alberta’s current challenge of Federal Just Transition legislation, when the reality is, most of Alberta’s largest players have been advancing a transition for years. I have to ask what value there is in putting ourselves in front of an already moving train when there are so many other important portfolios desperate for attention, hello perma-crisis fueled by geopolitical instability, women's rights, indigenous reconciliation, healthcare, inflation/cost of living, affordable housing, and aging populations.

Sure, you could pass this off as a distraction, but the dissent is rising and is coming from powerful actors that have influence in advanced economies and the investment of billion dollar pension plans. It is also going to waste valuable resources in the courts and entities like the SEC and prominent asset management firms. The ESG investment trend is booming, being driven by stakeholder capitalism and all the other reasons aforementioned, but the flywheel has only just started to turn.

I’ve watched sustainability and ESG evolve for two decades. It’s taken a long time for even the most sophisticated actors to get their strategies honed in, and systems in place to ensure their long term success through the delivery of that strategy. Those companies opted to be first movers, seeing sustainability as a competitive advantage and now reaping the rewards in that. Well defined and integrated ESG strategies, emergence of Chief Sustainability Officer positions, and cultural transformation being undertaken to integrate ESG into operating models and decision making frameworks are moving to maturity, but we are still at a precipice. Turning around and taking just one step back will impact people, the environment and ultimately financial performance, costing organizations more in the long run.?

The political polarization of ESG is not exactly what ESG, or the planet, needed at this moment in time. I suspect that the dismissal of woke ESG will be the passing fad, rather than ESG itself; too much has already been invested and too much is at stake if not. C-Suites ought to have a discussion re-aligning organizational commitment to strong ESG performance and leverage their government relations teams to get engaged in this matter loudly and quickly. Uncertainty is complex, but decision making which embraces uncertainty can lead to better outcomes. We don’t need to pretend that there isn’t very real scrutiny of ESG investing, we just need to continue advancing the systems that measure the benefits, standardizing criteria, rewarding the corporations that demonstrate leadership, and responding to an increasingly woke-population. Because this is the kind of wokeness I can get behind.?

#energytransition #esginvesting #esginvestment #climatechange #esgstrategy #greenwashing