Environmental Social and Governance (ESG) began to take shape in the mid-2000s as a movement to encourage more sustainable and “fair” work practices. Some companies likely viewed ESG as a good business practice that would help bolster their public image and help their bottom line.
ESG has since become a divisive political and social tool that is being viewed by some as a threat to business, investments, and innovation.
Recently, there have been government “hearings,” voices of dissent from the Security and Exchange (SEC) Commissioners, and a private company launched a platform that states it is designed to counter “woke capitalism.”
US Oversight Committee Hearing
The second US House of Representatives Oversight Committee on Environmental Social and Governance (ESG) was held on June 6, 2023. The hearing was titled “ESG Part II: The Cascading Impacts of ESG Compliance.”
The purpose of the hearing, as stated by the Chair (Congressman Pat Fallon, a Republican from Texas) in the opening statement is to examine what ESG really means for workers and consumers and how decisions made in board rooms and global climate conferences have real-world impacts at home.
Activist Asset Managers
Congressman Fallon asks, “What are the social impacts of using ideological activism to change/shape corporate behavior?” He then referred to the first hearing when two state Attorneys General warned of the impact ESG policies in the hands of “activist asset managers.” These managers control an estimated $126 trillion or 30% of all global assets. This is money invested by private individuals and pension funds, many for retirement.
The current opposition includes not just those on the political right. Katie Porter, a Democrat from California said in the hearing, “I think companies should be free to decide for themselves whether ESG practices are beneficial to their bottom line…asset managers should be free to decide that ESG data helps them make good valuation decisions and good investment decisions and if they don’t, they should be able to ignore it” (Source: Ropes and Gray).
As an example of the potential economic (global and personal) impact of the unchecked ESG push, last summer American Century Investments released a statement regarding the Sri Lanka ESG disaster – “A Cautionary Tale About ‘Just Transition’ to Sustainability.”
Required Scope 1-3 Emission Reporting
The focus of the objections to the current ESG push includes the proposed SEC mandatory reporting as well as concerns over the government (as opposed to the free market) directing investments.
The law firm, Allen Matkins wrote the following, “In March 2022, the SEC proposed rule changes that would require public companies to disclose climate-related risks, including data on greenhouse gas emissions, in their registration statements and periodic reports…Under the proposed rules, companies would be required to disclose data pertaining to direct greenhouse gas emissions (Scope 1), indirect emissions (Scope 2), and, most controversially, emissions from upstream and downstream activities indirectly generated by a company along its value chain (Scope 3).” They go on to say that these rules will likely be challenged in court.
Scope 3 Emissions are assets not controlled by the reporting company and can include accounting for GHG emissions from activities such as employee commuting, emissions from travel and hotel stays, conferences, trade shows, and much more.
These perceived intrusive reporting requirements are getting negative feedback as firms are increasingly concerned about the overreach of the government, lenders, and others in their supply chain.
Vendor Adherence to ESG May Pose a Business Risk
This growing chorus of concern is leading some companies to actively oppose ESG overreach. As some are pointing out – there is a business risk not from climate change, but from doing business with companies that, via adherence to ESG, could push unwanted policies onto their business.
1792 Exchange is a 501(c)(3), non-profit organization whose mission is to “develop policy and resources to protect and equip non-profits, small businesses and philanthropy from ‘woke’ corporations to educate Congress and stakeholder organizations about the dangers of ESG.”
They have assessed more than 1,500 companies’ policies, practices, and other relevant criteria to determine the likelihood a company will cancel a contract or client, or boycott, divest, or deny services based on views or beliefs.
On their website, they evaluate companies from banking, data security, energy, email marketing platforms, insurance, real estate, and more. They rate the risk these companies may pose to their customers.
The most vocal ESG critic from SEC’s office has been Commissioner Hester Peirce. On April 28, 2023, Ms. Peirce delivered a speech in Stockholm, Sweden strongly condemning ESG as it moved from voluntary to mandatory or coercion.
“These (ESG) standards cannot help but direct the allocation of private capital, especially when they are combined with sustainable finance initiatives designed to encourage financing of favored activities and the defunding of disfavored activities. Indeed, they appear intended to do exactly this: to direct private capital flows. As such, they are meant not primarily to serve investors’ needs but rather to direct the allocation of private capital to further government ends.”
“This commandeering of private capital in the name of ESG causes me grave concerns.”
Limiting Human Ingenuity to Address Global Problems
In her testimony, Ms. Peirce warns of the dangers of limiting human ingenuity and centralized, government-sanctioned ideas.
“Scientists can help regulators estimate how the climate is changing, technologists can help regulators predict which solutions for mitigating and adapting to these changes look most promising, and economists can advise about the viability of those solutions. But nobody – not even the most capable regulators advised by the most qualified experts – can prophesy where, when, and how the most important innovations will arise.”
“A regulator trying today to drive capital flows toward green technologies might be doing the opposite inadvertently. Solutions to our greatest problems will come – in ways we could never have imagined – from people, many of whom are just now being born and educated. In a fully taxonomized world would these people with truly original ideas be able to access capital? Inflexible taxonomies, updated through the slow political process, are static solutions to dynamic problems like food insecurity, water shortages, educational needs, air pollution, access to medical care, climate change, and many other problems we have not yet seen.”
Another SEC Commissioner, Mark Uydea, stated in part, “Any emerging regulations should be careful not to tip the scale in favor of any particular political or social cause.”
In our October 14, 2022, article Will Farmers Be Allowed to Feed the World?, we discussed some of the risks associated with excessive ESG–related policies.
Operating a business in a respectful and responsible manner, including responsible environmental management, is something most well-run companies strive to achieve. There is already an abundance of environmental regulations framing the way corporations operate. The ESG movement has changed this and, increasingly, company governance is being mandated via government policy that may jeopardize the viability of companies. A respectful company philosophy, not just in name but in practice, helps companies attract talent. These values have historically been driven by the company, boards, and stakeholders.
Here is a link to the House Hearing, “ESG Part II: The Cascading Impact of ESG Compliance.”
If you need assistance on an environmental issue (permitting, planning, assessments, closures, litigation support, etc…), contact Jeffrey Bolin, M.S. at 248-932-0228, Ext. 125.
Dragun Corporation does not use artificial intelligence in drafting our blogs or any other material.
This blog was drafted by Alan Hahn. Alan has an undergraduate degree in Environmental Studies and completed a graduate program in Environmental Management. He has worked in environmental management for 45 years. He has written hundreds of blogs and articles. His published work includes Michigan Lawyers Weekly, Detroiter, Michigan Forward, GreenStone Partners, Manure Manager Magazine, Progressive Dairy, and HazMat Magazine.
The blog was reviewed by Jeffrey Bolin, M.S. Jeff is a partner and senior scientist at Dragun Corporation. He is a published author, frequent speaker, and expert witness. His expertise in environmental due diligence, PFAS, vapor intrusion, and site assessments has led to projects in the US, Canada, and overseas. See Jeff’s Bio.
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