The Environment, Social, and Governance (ESG) criteria, which guide investment decisions by factoring in an organization’s impact on society and the environment, have recently been pushed into the limelight. With heightened attention comes controversy; criticisms have emerged from both the political right and left, and Congress held hearings in May and July.
To navigate these critiques, ESG advocates must be clear-eyed, understanding the nuances of the arguments against them and crafting strategic responses.
Investment and divestment sit at the heart of the debate.
The History And Critiques Of SRI
Socially responsible investing has a deep history, dating back to the late eighteenth century with the Quakers prohibiting participation in the transatlantic slave trade and nineteenth-century evangelist John Wesleyan proclaiming that earning profits at the expense of another person’s welfare was sinful and demanding his followers avoid participating in gambling and booze trades.
Divestment tactics became famous in campaigns against South African Apartheid in the 1980s and is a critical tool utilized by environmentally conscious investors such as Norway’s Government Pension Fund Global.
Despite this history of looking at the non-financial impacts alongside financial returns, critics have targeted ESG criteria and strategies with some degree of fervor.
Critiques from the right of the political spectrum draw on the somewhat successful campaigns to make critical race theory controversial outside the academic context in which it formed. Another oft-cited example is the Heartland Institute, a petroleum lobbying group that has associated ESG with terrorism. Other campaigns tie Bank of America to activist causes deemed controversial.
Perhaps most significant is the alleged intertwining of ESG with the Boycott, Divestment, Sanctions (BDS) movement, which calls for action against Israel due to alleged human rights violations against Palestinians. The Anti-Defamation League has accused the BDS movement of antisemitism. The attempt to align ESG’s impact-driven investment decisions with the politically charged BDS movement shows a clear effort to discredit ESG initiatives.
A specific sector of ESG skeptics wants to tie disagreements over material disclosures to tangential culture war disputes such as K-12 school curricula and gun control.
Meanwhile, left-wing critics question the very structure of ESG.
Publications like The Intercept have reported that lawmakers opposed to ESG initially focused more on Diversity, Equity, and Inclusion (DEI) initiatives. Once the Securities and Exchange Commission announced plans to enforce mandatory ESG reporting regulations, these lawmakers shifted their attention to ESG.
Jacobin and Dissent argue that ESG’s green funds constitute a minuscule fraction of indexes and have little impact. Indeed, sustainable funds’ assets under management (AUM) totaled nearly $2.8 trillion at the end of 2022, accounting for just 7% of total AUM globally. It registered an increase from five years ago when sustainable AUM was 4%.
They also suggest that entities like the United Nations Framework Convention on Climate Change (UNFCCC) serve merely as vehicles for greenwashing by various corporations and even countries such as the United Arab Emirates.
At the state level, ESG strategy faces challenges as well. Texas Comptroller Glenn Hegar divested from almost 350 funds and ten asset management companies that promote ESG. Florida Governor and presidential hopeful Ron DeSantis approved a resolution that bars the state’s pension fund from considering ESG factors in making investment decisions. Several other states have followed suit. Perhaps surprisingly, half of all anti-ESG bills in Republican-led states have failed.
Meanwhile, consensus escapes ESG supporters in the United States: some demand bolder regulations, others debate the efficacy of investment versus divestment in facilitating climate transition, and yet others feel disheartened by the prioritization of fiduciary responsibilities over ESG in states known for their pro-ESG stance, such as California and Maine.
Despite these headwinds, the demand is there globally, even if the market has narrowed in the United States as regulators demand greater transparency and controversy swirls. PwC reported that 75% of private market investors to stop investing in non-ESG products over the next two years. Asset managers globally anticipate their ESG-related AUM to surge to $33.9 trillion by 2026, while Bloomberg predicts it could reach $50 trillion by 2025. Regardless, this would mark a steep increase from $18.4 trillion in 2021.
Stratgies Of ESG Advocates
In response to these criticisms, market trends, and lack of consensus, ESG advocates have several strategies at their disposal.
One approach, employed by some higher education activists, involves embracing the moral dimension of ESG and aligning it with a specific political wing. Though certain investors try to impact certain cultural issues, they do not represent the total or even majority of ESG goals.
This approach frankly fails to garner support from the number of stakeholders needed to address crises such as the Sixth Great Extinction and fundamentally confuses calls to divest from political regimes with calls for everyone, including the very sectors contributing to the climate crisis, to invest in alternatives.
A second approach distances ESG from political rhetoric by emphasizing its focus on materiality and voluntary disclosures, as Daniel Crowley and Robert Eccles encouraged, or utilizing ESG factors alongside other established tools to assess long-term value creation, as suggested by Alex Edmans. This disposition garners wider acceptance and hues to existing accounting frameworks but alone may give license to cut corners with voluntary standards.
Finally, a third strategy combines moral and material considerations, underscoring the need for systemic change to tackle systemic risks such as climate change. ESG supporters might attract the greatest number of allies by emphasizing what we are working toward to counter attempts to tie us to approaches that rely on highlighting what they are against.
We need investment standards with teeth, whether from the private or public sectors or a combination of both.
To forge ahead, ESG supporters must build alliances and prioritize their goals.
Emphasizing the necessity for robust investment standards can rally the greatest number of allies, irrespective of whether these standards come from the private or public sectors. Moreover, the path to an equitable transition will require common ground to counter proposals limiting private investment and risk analysis and push for binding frameworks that command majority political support.
The journey for ESG advocates is complex and fraught with criticisms from various angles. However, advocates can guide the conversation toward constructive progress by understanding these criticisms, responding strategically, and emphasizing the ultimate goals of ESG – long-term sustainability, social responsibility, and efficient governance.
About the Authors
Travis Knoll, Ph.D. and Steven Hyland Jr., Ph.D. are faculty at Wingate University and are Senior Consultants at Responsible Alpha, an ESG integration consultancy and a signatory of the Net Zero Financial Service Providers Alliance.
