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ESG has had its ups and downs over the last few years. We hit peak ESG in 2021 with record investment flowing toward ESG-labeled funds and the highest number of mentions in earnings calls. Then came the anti-ESG backlash. Driven by a dark-money campaign, US states began to create anti-ESG policies, politicians and conservative social media influencers linked it to being “woke,” and – predictably – companies stopped talking about it.
Now, the battle over ESG has taken a turn, and the anti-ESG backlash is experiencing its own backlash.
The general sentiment is that the sustainability movement is here to stay. Most companies are still operating their sustainability programs, even if they do not publicize them, and almost never use the term ESG. Plus, multiple studies have shown that states with anti-ESG policies are losing vast sums of money. In Texas, for example, one study claimed that the state has lost almost $700 million because of its anti-ESG investment policies.
Now, anti-ESG policies are being challenged in the court. A couple of weeks back, a court blocked an anti-ESG rule in Missouri due to its vagueness and violation of the First Amendment (free speech).
This week, Texas, whose anti-ESG policy blocks state investment funds from investing in any company that ‘boycotts’ energy companies, has been sued by the American Sustainable Business Council in a federal court. The lawsuit claims that the Texas rule violates free speech (1st Amendment), and because it does not allow investors to challenge their removal from state funds, it violates their right to due process (14th Amendment). A charge that led a judge to block a similar anti-ESG bill in Oklahoma earlier this year.
Texas Comptroller Glenn Hegar, who is one of the defendants in the case, released a statement saying, “The plaintiff…seeks to undermine state sovereignty and force the state of Texas and Texas taxpayers to invest their own money in a manner inconsistent with their values and detrimental to their own economic well-being.”
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Robert Skinner, a partner at the law firm Ropes & Gray, claims that all of these anti-ESG policies will likely be blocked in courts as they are based on a fundamentally flawed premise: that positive social and environmental outcomes reduce profits. He said, “ESG risks are fundamental material financial risks that asset managers ignore at their peril.”
The anti-ESG backlash has not gone away and will continue to be a political football. Just last week, Republican state treasurers penned an open letter to the Business Roundtable, a group that includes the CEOs of some of the nation’s largest companies. The letter asked them to stop all ESG principles and use Exxon’s recent case against activist shareholders to ensure they stand up to “bullies.”