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Tim Mohin: ESG ON FIRE

Tim Mohin: ESG ON FIRE

Tim Mohin - ESG ON FIRE
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What’s in a name?  Apparently, a lot!

A viral WSJ article this week, “The Latest Dirty Word in Corporate America: ESG,” showed how Corporate America is turning away from ESG as the term becomes politicized and legal threats for greenwashing loom.

It seems like only yesterday when Corporate Social Responsibility (CSR) was replaced by Environmental, Social, and Governance (ESG) as the abbreviation du jour for companies to describe their sustainability efforts. The Wall Street Journal forecasts that it has come full circle, and “responsible business,” or some other version that includes the word “responsibility,” will take ESG’s place.

As former Kraft Foods CEO Daryl Brewster says, “You can be anti-ESG. It’s hard to be anti-responsibility.”

Although companies are distancing themselves from ESG, they are not stepping away from their programs. Whatever we call it, companies continue to make progress on their sustainability pledges – at least for now.

NYU Stern Professor Alison Taylor wants to get past the labels and into the content – she said: “What it takes to be a responsible business is still controversial, political and contested. These debates aren’t going away, whether we use the term ESG, sustainability, or corporate responsibility. But, let’s have the damn debate!”

A small editorial comment: Beyond returning profits to shareholders, a battle has raged for more than 50 years over the responsibility of companies for people and the planet. Nobel Prize-winning economist Milton Friedman penned an NYT OpEd titled The Social Responsibility of Business Is to Increase Its Profits in 1970, disparaging corporate responsibility as a threat to a free society. Despite his views, there has been a massive expansion of “corporate responsibility” over the last half century – including the 2019 statement from the Business Roundtable that the purpose of a company is to promote ‘An Economy That Serves All Americans’. For those who have been around this issue for a while, suffice it to say that this latest kerfuffle is but a blip and will not put the issue to bed.

ESG Investments Plummeting

The “anti-woke” backlash in the US, coupled with new regulations, like the SEC’s Names Rule, which requires investment funds to have 80% of their assets match the name of the fund, led to only six new ESG-named funds in the past six months (down from 55 in the first half of 2023), and other funds have removed their ESG labels.

This is evidence of a long-overdue shake-out of unsubstantiated ESG claims in the financial markets. But there continues to be evidence that ESG (can we still use that abbreviation?) adds value. New research from UBS found that hedge fund managers are increasingly considering ESG in their investments and found green assets may recover from their losses in 2024.

Moreover, new groups are being set up to combat the ESG backlash. One such group of over 100 business leaders, Freedom to Invest, aims to remind policymakers that companies should be able to invest as they see fit based on their material risks.

RELATED ARTICLE: Tim Mohin: 2023 in Review and 2024’s Emerging Trends

Another Year of ESG Litigation Ahead

REUTERS/Evelyn Hockstein

The new year saw Exxon Mobil, Koch Brothers, and The American Petroleum Institute losing their appeal to move a climate case in Minnesota to federal court.

The lawsuit, filed by Minnesota in 2020, asserts that the energy industry employed deceptive marketing practices over several decades to downplay the risks of burning fossil fuels and undermine public understanding of climate change. The state contends that these entities failed to disclose these risks to the public and actively worked to undermine climate science, resulting in significant economic damages for Minnesota.

Climate and ESG litigation is becoming so commonplace it’s becoming a money maker for “litigation financing.”  This is a practice where lawsuits that target supposed corporate misdeeds, such as broken environmental pledges, exploited workers, or corporate governance failings, are bankrolled by a hedge fund in exchange for a slice of the settlement. A successful case can leave a litigation funder with returns well in excess of 25%, and hedge fund managers plan to increase their investments in ESG litigation.

This Smart Read article is contributed by Tim Mohin, Global Sustainability Leader, BCG. Every week ESG News delivers smart commentary from ESG practitioners and experts to unpack issues of the week. Submit your ESG Smart Read to [email protected]


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