The U.S. ESG Movement May Need to Reboot After the Midterm Elections

A more sustainable U.S. economy is slowly taking shape, partly due to the growth of the corporate ESG (environment, social and governance) movement. However, the work is far from over. Even as the impact of climate change takes hold, standards for ESG reporting and transparency are still in flux. Partisan state policies are also creating new roadblocks. Depending on the results of the U.S. midterm elections next month, ESG advocates could find themselves battling Congress as well as state-level officials. 

ESG is still working out the kinks

ESG reporting is a profit-making effort at heart. It defines action steps that support a holistic approach to corporate health, with climate change providing the essential context for economic decarbonization.

The evidence in support of ESG reporting is beginning to grow. One key test occurred when the market crashed in March 2020 after COVID-19 lockdowns began. ESG funds were outperforming the S&P 500 as of January 2020, and they also demonstrated that they were better equipped to handle the upheaval of the COVID-19 pandemic than conventional funds.  

In April of 2020, Morgan Stanley noted that funds focusing on green infrastructure were in a better position to benefit from the anticipated green recovery. The firm Morningstar also weighed in with a positive outlook for ESG investing. 

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More recently, a note of caution has emerged. In September, Bloomberg noted that “plain-vanilla” funds were doing better than ESG funds, partly due to the influence of Russia on energy stocks.

The publication Investment Week also recently noted the absence of a strong positive correlation between two ESG rating systems developed by Morningstar and the firm Refinitiv. 

In addition, CNN also weighed in with a dire warning earlier this week: Based on an exclusive analysis provided by Refinitiv, CNN reporter Nicole Goodkind wrote that “the rapid pandemic-era uptick in ESG fund investing has now stopped completely” and that “ESG funds in September saw their largest outflow of investor cash since the March 2020 recession.”

Follow the money

That sounds dim enough, but Goodkind also took note of the influence of partisan politics on ESG investing in the U.S. Specifically, she described how policymakers in some states are targeting ESG firms.

“A large number of Republican-led states, 20 and counting, have said they will remove ESG-focused firms like BlackRock from managing assets in their state retirement plans. BlackRock has so far lost more than a billion dollars in commitments because of these changes, according to Robert Jenkins, head of Lipper Research at Refinitiv,” Goodkind reported.

Goodkind did a service to the profession of journalism by taking note of the partisanship that is driving opposition to ESG reporting, and singling out the Republican Party.

The fact is that “both sides” are not slinging the “woke capitalism” canard at BlackRock and other firms. Both sides are not making an effort to dissuade corporate policymakers from adopting ESG principles. Only one side has cut itself adrift from fact and evidence, not only regarding ESG reporting but across the board on a wide range of issues. The gap is especially evident in climate science, where the U.S. Department of Defense has also adopted a strong climate risk management position at odds with Republican orthodoxy.

Short-term gloomy, long-term rosy

Though Goodkind paints a gloomy picture on the ESG investor side, she also references a new KPMG poll of 1,300 CEOs, including 400 in the U.S., that sounds a more positive note.

The poll does indicate that a substantial number of CEOs have already paused their ESG programs amid fears of a looming recession. In addition, 59 percent said they plan to pause or reconsider their ESG programs in the coming months. 

Still, considering the aggressive anti-ESG posture adopted by the Republican Party in the run-up to the midterm elections, it is possible that some of the KPMG respondents were hedging their bets to some degree. Business leaders who have committed to ESG reporting may be preparing to make a sharp pivot if the Republican Party wins control of the U.S. House of Representatives, the Senate or both. (The KPMG survey was conducted last July and August, after opposition to ESG emerged as a partisan political strategy linked to fossil energy interests last spring.)

In fact, KPMG reached a positive conclusion for ESG over the long run. “Companies that embed ESG into their long-term business strategies will unlock value. In fact, 70 percent of U.S. CEOs believe their ESG programs improve their financial performance,” the report reads.

Despite the possibility that control of Congress will pass into Republican hands, KPMG also made the case that ESG reporting is here to stay. “CEOs increasingly agree that ESG programs improve financial performance, which includes being able to secure talent, strengthen the employee value proposition, attract loyal customers and raise capital,” the report concludes.

On ESG reporting, accountants are counting themselves in 

Another indication of the staying power of ESG comes from the Association of International Certified Professional Accountants. Last summer, the organization created the new title of “global head of environmental, social and governance” and conferred it on the Australian CPA Jeremy Osborn, who began his career with Unilever.

“Osborn’s hire represents AICPA and CIMA’s continued commitment to provide all accounting and finance professionals with the resources, tools and skills they need to support the transition to more responsible business practices, enhance the reliability of ESG-related disclosures and place long-term value creation at the heart of corporate activities and reporting,” AICPA wrote in a press release dated July 12.

With AICPA taking a hands-on approach, the prospects for standardizing ESG reporting have improved. That should help push back against partisan interference, while also satisfying environmental advocates who are concerned about greenwashing in ESG reporting.

“Working for the world’s largest and most influential accounting organization is a great opportunity for me to help move the needle on ESG management, measurement and reporting, which provide sustainable foundations for long-term value creation by organizations,” Osborn emphasized.

As for the Republican Party, its leadership has given up trying to reconcile its anti-business stance on ESG principles with the party’s longstanding claim to represent the interests of business owners and investors.

Perhaps they have concluded that their voters simply don’t care about the contradiction. Perhaps they are right.

One way or the other, the picture will come into focus once Election Day 2022 has come and gone.

Image credit: Jonathan Simcoe and Amy Shamblen via Unsplash