The anti-ESG movement is winning because it is stifling debate and making sustainable finance toxic, warns Peter Cripps
Last week we launched our first The Future of ESG Data conference in the US.
I'm pleased to say the conference, which has been a well-attended virtual global event for the past two years, was also a success in-person, with more than 150 people attending to hear an insightful line-up of speakers.
The event has proved a resounding hit since we devised it three years ago, because it helps inform the market about the strengths and weaknesses of ESG data, how it can improve and its use cases. And with ESG increasingly being incorporated into investment decision making, and being linked to bond and loan transactions and executive pay, it is an important topic.
But one of my key takeaways from the day's deliberations in Washington, DC, is that the market in the US is uniquely challenged by the extraordinary extent to which the subject of ESG has been politicised.
We held the same conference in London in October, and the flavour was very different. At the Europe-focused event, the increasing levels of regulation facing the market dominated the debate, but politics didn't rear its ugly head.
In the US, it was a different story. Our conference producer found speaker recruitment surprisingly hard, with many people approached preferring to keep their heads below the parapet, rather than suffer the slings and arrows that ESG attracts in the US.
A US Securities and Exchange Commission (SEC) Commissioner spoke at the conference in London, but in the US most regulators, including the SEC, declined to talk, despite most of them being based in DC.
And perhaps you can't blame them! The one that did speak – the Department of Labor – is currently being sued about its guidance that pension funds can consider ESG factors if they consider them material to returns, while the SEC has been warned it faces a legal fight about its forthcoming climate disclosure rules.
You couldn't keep politics off the agenda at the US event. Not to talk about the 'ESG backlash' would have been to ignore the 'elephant in the room' (pardon the double entendre).
As one of the speakers, Alice Hill, senior fellow for energy and the environment at the Council on Foreign Relations, put it: "In the US there's a tremendous fight going on, particularly with regards to the E in ESG. There's a bear fight, which makes it hard for the private sector [to know what to do].
"We are all waiting with bated breath for the SEC regulations... We don't know where it will land.
"[ESG] has become a political hot potato – it reflects a deep divide in our country. This divides along party lines, with blue states trying to push ESG as a consideration."
The ESG backlash in the US is fierce and has the potential to slow down progress beyond its borders. In the latest manifestation, the Louisiana Attorney General Jeff Landry launched an investigation into collaborative investor engagement initiative Climate Action 100+. Landry's office seeks to determine whether some asset management companies that are part of the initiative have violated their fiduciary duties by focusing on ESG.
It seems to me that ESG has been dragged into an ideological war against so-called 'woke capitalism' (What a dreadful phrase!).
And that is a shame because, as the conference heard, ESG can provide another lens through which to view risk, which can surely only be a good thing.
Avid readers of Environmental Finance will know that I would defend freedom of speech and I think it important to hear the other side of the story. But the problem in the US, is that the anti-ESG crowd has created such a toxic environment that they are shutting down debate because people don't want to get involved. And that is a victory for them.
If people are too scared to talk, the market can't progress. While the US has some sustainability leaders, there are also many laggards. They need all the debate around the sustainability agenda they can get.
The other worry is that the anti-ESG movement is not just stifling debate but may also be stifling regulation, which has been a driving force for a lot of interest in the subject in Europe. That may be why the SEC climate rules look set to be delayed until the second half of the year.
The way in which ESG is being used as a political football in the US, has exposed a key weakness of ESG – that it is such an all-encompassing and woolly concept, that it covers more than simple risk mitigation. And this allows room for critics to attack it as 'woke'.
We need to move to a more nuanced use-case based proposition for ESG, which will allow for some of the criticisms to be batted away.
Another interesting consideration is that the ESG critics tap into a fear that workers in yesterday's industries such as coal will be put out of work amid the transition to a net-zero carbon economy. This highlights the need for a 'just transition' which leaves no one behind and helps retrain these people in sustainable industries.
Some ideas to discuss at next year's conference, perhaps!
Peter Cripps is the editor of Environmental Finance.
Environmental Finance’s coverage of the The Future of ESG Data conference includes:
Companies:Council on Foreign Relations