Aniket Shah, Global Head of Environmental, Social, and Governance (ESG) and Sustainability Research at Jefferies, recently joined Robert Eccles and Daniel Crowley in a conversation about the political complexities and misconceptions surrounding ESG.
They offer insight into ESG’s unfortunate entanglement in political and cultural battles, addressing common misunderstandings held by both the left and the right. They discuss efforts to bridge political divides, acknowledging the often-overlooked overlap between ESG disclosure and conservative values. The group also expressed optimism for the future of the ESG movement, even if it eventually moves away from the ‘ESG’ moniker.
Robert Eccles is among the world’s foremost experts on integrated ESG reporting. He is the Founding Chairman of the Sustainability Accounting Standards Board and a former Professor of Management Practice at Harvard Business School.
Daniel Crowley is a partner in the Washington, DC office of K&L Gates LLP, where he leads the firm’s global financial services policy practice. He previously served as Chief Government Affairs Officer at the Investment Company Institute and Vice President and Managing Director in the Office of Government Relations for NASDAQ.
How are individuals from different political persuasions coming together to advocate for ESG principles?
Crowley: We’re witnessing a power struggle in global politics, and, unfortunately, ESG often gets ensnared in these debates.
On the one hand, you have political factions on the left and right waging assaults on each other’s policy agendas. On the other, you have a concentrated desire within the investor community for increased transparency related to material risks.
That’s where ESG centers – not in the debates between the far right and far left, but in the investor community’s search for quality information. The more we conflate these issues, the more our public understanding of ESG is diminished.
Eccles: Opposition on the Republican side may be louder, but there’s considerable pushback from the left, too. Progressives claim it’s not ‘true sustainability’ – just another tool for value creation.
Loud, unconstructive groups on both extremes pollute our discourse, but if you look past the political theater, there’s more bipartisan alignment around ESG than one might expect. It’s time for both sides to lower their defenses and engage in productive dialogue around material factors.
Political repercussions – real or imagined – have a significant impact on our clients’ decision making. Can you offer some insight into our heated politics’ effect on the private sector?
Eccles: We meet with a lot of company leaders and asset managers, and despite the political rhetoric, they are continuing to discuss ESG with investors, albeit more quietly.
Some concerns around ESG are self-inflicted, with firms making grandiose claims about saving the world from climate change and inequality. When our conversations are disciplined, they breed consensus. ESG is about distinguishing between material risk factors and positive and negative externalities.
Politically, there’s an important debate to be had about the roles of the public and private sector in our society. On the issue of ESG, though, there remains broad engagement from both sides of the aisle.
Crowley: Today, many House Republicans equate ESG with the Green New Deal. They think it’s the product of an AOC-led ideological movement and view it as a potential threat to our democracy.
It’s important to remember that ESG conversations date back 20 years, at least. We need to take a step back and remember this is a risk issue: when companies aren’t transparent, they get wiped out. We saw this with Enron, WorldCom, and now, Silicon Valley Bank.
Republicans should remember that these are conservative principles. We want free markets to be rooted in an informed assumption of risk. When the right shoots at ESG, they form a circular firing squad, hitting key constituencies in the Republican party: asset managers, brokers, hedge funds.
How is the idea of an ‘ESG fund’ or an ‘ESG stock’ undermining the conversation around ESG?
Eccles: People make the mistake of confounding ESG with impact. ESG integration is about data analysis – it doesn’t inherently make the world a ‘better’ or ‘worse’ place.
An impact fund invests to address societal challenges. These funds could still fall short on ESG practices in their operational strategies! Socially responsible investing is important, but these labels muddle the public discourse around ESG, and we need to distance ourselves from them.
Crowley: Another issue is the narrow interpretation of ESG’s components. In Washington, DC, ‘E’ has become synonymous with climate change, ‘S’ with human capital, and ‘G’ with proxy voting. People don’t appreciate the scope of ESG analysis.
These concepts are much broader than they’re often treated by our elected officials. The current dialogue no longer represents the foundation of ESG, which is managing enterprises for long-term value creation.
If you were to emphasize one or two key points to ESG skeptics on both the right and the left, in a bid to find common ground, what would those be?
Eccles: If I’m talking to someone who claims not to like ‘ESG,’ I’ll tell them I don’t like ESG either!
I like material risk factors. I like addressing externalities. I won’t try to dissuade you from disliking ESG; I’ll just recenter the conversation around managing risk and equipping investors with quality data. Then, we have plenty to discuss.
Crowley: Many on the left call for increasingly detailed disclosures, regardless of their financial materiality. The truth is that disclosure, alone, can’t move the needle on climate change.
If we hope to tackle climate change, we need to leverage macroeconomic forces. Concentrate on implementing measures like a carbon tax. As these policies take effect, they’ll enhance the relevance of ESG materiality, allowing the goals of ESG proponents and climate activists to advance in unison.
