Douglas Chia is one of the most respected authorities on corporate governance and we are honored to be able to share his recent speech, the most insightful discussion we have seen of the challenges to ESG..
Anti-ESG: A War On Two Fronts
By Douglas K. Chia, President, Soundboard Governance LLC; Senior Fellow, Rutgers Center for Corporate Law & Governance
Remarks delivered to the Practicing Law Institute’s “Corporate Governance: A Master Class 2023” on April 11, 2023 in New York City.
When I teach law students, I start by giving them an overview of the key players in the corporate governance ecosystem. The primary players are (1) the board, (2) the shareholders, and (3) management. I try to paint a picture of corporate governance as an epic wrestling match among those three players as to which gets to make the most important decisions for the company. In essence, it’s a philosophical battle for who controls the company.
Then, I go into the many other stakeholders. These people have no actual rights. They don’t appear anywhere in a company’s articles of association or bylaws. But they are nonetheless key players in corporate governance: They are a company’s customers, its employees, and the communities where the company is located and does business.
I then expand the circle to talk about other players who impact how the primary players and stakeholders play the game: the courts, regulators, non-governmental organizations, and the media.
Talking About Politics
On the governmental side, I left out the legislature because they are not as often involved in corporate governance as the other branches. But when they do act, they can fundamentally change the rules of the game. The greatest examples of this are the Sarbanes Oxley Act of 2002 and the Dodd Frank of 2010. These two pieces of legislation were game changers. But even though politicians created these laws, I never thought I’d be here to talk about politics. Of course, a lot of politics go into the creation and passage of these laws, but I’m here today to talk about politics of a much different sort.
It was only last month that President Joseph Biden used his veto power for the first time since he took office in January of 2021. And he used it on a piece of legislation that one can only describe as relating to corporate governance.
Think about that. The President of the United States… used the power given to him under Article I, Section 7 of the US Constitution… to refuse to sign… and to send back to Congress… a Joint Resolution of the US House of Representatives… and the Senate… that was passed with votes from both parties in each chamber… about corporate governance. Not a bill about cutting entitlements, restricting immigration, sending military support to Ukraine, or Taiwan. And not over abortion or gun control—the two most divisive issues in our country.
No. He dropped the hammer on Congress over legislation to nullify a Department of Labor Rule for employee retirement plans under the Employee Retirement Income Security Act of 1974—better known as “ERISA.” A Rule that rephrases language about what pension plan fiduciaries may consider when making investment and proxy voting decisions.
Why was this esoteric Rule, titled “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” the subject of a Presidential veto? It has to do with a three-letter acronym contained in the Rule that you will hear throughout today’s program: E, S, G. Environmental, Social, Governance.
What Is ESG?
What is ESG and who coined it? The term dates back to an initiative of the United Nations in 2004 that produced a report called “Who Cares Wins.” The introduction to that report says:
In an increasingly complex and interconnected world, the importance of actively managing risks and opportunities related to emerging environmental and social trends, in combination with rising public expectations for better accountability and corporate governance, presents a new set of challenges with far-reaching financial consequences for corporations.
In my mind, considering environmental, social, and governance factors alongside financial measures when making major decisions is what people do. When deciding on where your family is going to live, you’re going to want to know about the climate, education, access to mass transportation, social services, cultural institutions, and other things about the location, in addition to the cost of living. When you strip it down, that’s what the concept of ESG is: considering factors relevant to the decisions you’re making, some of which are hard to value in dollar terms.
Until very recently, companies that reported on their ESG practices were the exceptions, and ESG investing was a niche category. In 2010 only 35% of S&P 500 companies regularly issued some kind of sustainability or ESG report. Fast forward to 2020: 86% of S&P 500 companies issued such reports. Ten years ago, there were about 100 open-ended “sustainable” or ESG funds in the United States. Today there are just under 600. Almost half of those launched in 2020-2022. At the beginning of this year, the combined assets of US sustainable funds was $286 billion, triple what it was five years ago. (This is data from Morningstar.)
These trends are probably nothing you haven’t heard before. More money is flowing into funds with ESG investing strategies. The largest asset managers are demanding both more disclosure and more action on ESG issues. That puts pressure on boards to do more, first by figuring out what exactly investors want them to do. And the pressure is ratcheting up quickly. This will likely be a constant theme in today’s programming.
A War On Two Fronts
Getting back to politics, the growth of ESG business and investing is not seen as a good thing by everyone. To some, on the investing side, it’s misguided, Pollyannish, and makes no economic sense. To others, in the political arena, it’s threatening to the American way of life. Today, you will hear some talk about the “anti-ESG” movement—the open backlash against ESG.
Here is how I look at the anti-ESG movement, and how I think your boards must look at it: This is a war being fought on two fronts. A lot of the lashing out looks and sounds the same, but I’m here to tell you that it is not. It’s important for your boards to be able to distinguish, to recognize the different actors mounting the attacks and understand the underlying motivations of each, which are fundamentally different. Allow me to describe.
The Economic Front
I will call one front of this war the “Economic Front.” Despite the rapid acceleration of ESG reporting and investing, ESG has many detractors in the investment community. You’ve probably read or heard of a lot them: Tariq Fancy formerly of BlackRock; Aswath Damodaran at NYU’s business school; Vivek Ramaswamy at Strive Asset Management. These folks are as disbelieving of the thesis behind ESG business and investing as ESG proponents are bullish.
At the core of the debate is whether ESG business practices and investment strategies increase firm value—or at least mitigate downside risks—or place constraints on the growth of firm value or even destroy it. The ESG naysayers believe that investing solely based on traditional financial performance, considering traditional risk factors, and largely leaving out externalities, still is the smartest way to make investment decisions. They are skeptical of the notion of climate change risk being akin to financial risk. The most cynical critics attack ESG as leaving neither investors nor the planet better off, and in some cases making the world’s problems even worse.
Both the ESG proponents and detractors have their empirical and anecdotal evidence and favorite case studies. And the debate very much ties into the continuing arguments over “shareholder primacy” versus “stakeholder capitalism,” “short-termism” versus “long-termism,” etc. I’ve been involved in these debates in various capacities and believe that each side has legitimate points worthy of vigorous discussion in the corporate and investing worlds.
That’s the Economic Front of anti-ESG. Your boards need to think about which viewpoint your companies’ strategies and tactics currently reflect—and need to reflect—for long-term value creation.
The Political Theater
I will call the second front of the anti-ESG war the “Political Theater.” On the evening of Tuesday, November 8th, 2022, Florida Governor Ron DeSantis gave a re-election victory speech where he very dramatically said, “Florida… is where woke… goes… to die!” This soundbite received a lot of play in the media. Anti-wokeness resonated with an important block of voters for Governor DeSantis and many other Republican candidates in the 2022 midterm elections, so much so that it may become one of the primary talking points in the lead-up to the 2024 elections. OK, that’s “wokeness.” What does that have to do with ESG?
The dictionary gives us two definitions of “woke.” The first:
Aware of and actively attentive to important societal facts and issues (especially issues of racial and social justice).
Politically liberal (as in matters of racial and social justice) especially in a way that is considered unreasonable or extreme.
These two definitions merely outline the debate over wokeness, which has become vitriolic with frequent accusations of racism, homophobia, elitism, and McCarthyism. Today we are on the cusp of “ESG” and “woke” being used interchangeably and in the pejorative.
Here are words from Representative Andy Barr of Kentucky, the original sponsor of the Joint Resolution vetoed by President Biden, referring to an earlier version of his bill:
Americans trust their financial advisors to invest their hard-earned money in a way that maximizes returns, but more and more of the ‘woke’ left are forcing their climate agenda on middle-class families by pushing clients to invest in green funds or other politically charged goals.
Speaking against a proposal for a federal central bank digital currency, Governor DeSantis said:
[it is] the most recent way the Davos elites are attempting to backdoor woke ideology like ESG into the United States financial system, threatening individual privacy and economic freedom.
Conservative advocate and fundraiser Leonard Leo recently said
The ESG movement is polluting our culture and assaulting the dignity and worth of people.
The politicians who try to equate “woke” and “ESG” purport to espouse the same principles as the anti-ESG warriors on the Economic Front.
Governor DeSantis insists that this is about:
ensuring that all investment decisions focus solely on maximizing the highest rate of return.
Congressman Barr has said:
Hardworking Americans don’t need a regulation from Washington that steers them into higher fee, lower performing, less diversified funds, and that’s what these so-called ESG funds are.
But if there’s one thing I’ve learned about politicians, it’s that they care about one thing: getting elected. Their currency comes in the form of votes. Whoever collects more wins. The political theatre we are witnessing over ESG has everything to do with votes and very little to do with fiduciary duties and retirement investment returns. How do I know this?
After the Kentucky State Treasurer blacklisted 11 financial institutions (including BlackRock) from doing business with the state because she thought they were boycotting the energy industry, the chair of the state County Employees’ Retirement System (CERS) opposed this, saying:
CERS has determined that the requirements… are inconsistent with its fiduciary responsibilities with respect to the investment of CERS assets or other duties imposed by law relating to the investment of CERS assets.
In Indiana, the Indiana Public Retirement System estimated that one anti-ESG investing bill in the state legislature could result in reducing the investment returns for the retirement funds it manages by $6.7 billion over the next 10 years, slashing the estimated annual return on investment from 6.25% to 5.05%.
Senator Joe Manchin, Democrat of West Virginia, voted in favor of the Joint Resolution, but in his written statement he cited the support of the West Virginia Coal Association and put his emphasis on increasing domestic fossil fuel production.
Advice to Boards: Stay the Course
So, now that I have laid out and illustrated the two fronts of the anti-ESG war, this is my advice to your boards: Pay attention to the Economic Front. Engage in it by reconfirming the company’s values and telling your ESG story. Then stay the course. And stay away from the Political Theater. Here’s why:
Investors Have Embraced ESG on the Economic Side. Those in the investment world are by no means unanimous on the question of whether ESG investing is a net positive or negative. But the trends of ESG funds being created and funds flowing into them are undeniable. By all accounts, the trajectory will continue upwards. Studies by PwC have estimated that ESG investments in the US could double in five years with 81% of institutional investors planning to increase their allocations to ESG products over the next two years. That’s ESG-specific investing. Overall, 82% of all US-based asset managers systematically incorporate or integrate ESG information into their investment processes.
Investors Have Embraced ESG on the Voting Side. There is much talk about the rise of so-called “conservative” shareholder proposals. But they are nothing new. I’ve personally dealt with them before on issues like health care reform, taxes, birth control, and environmental protection. Despite the attention this time around, the anti-ESG proposals are not likely to gain any more traction this year. The 2022 proxy season and early 2023 annual meeting voting results clearly show that investors can see through what these types of proponents are trying to do: supplement the Political Theater.
If you look at the two proposals filed at my former company Johnson & Johnson last year on racial equity audits, you’ll see that the actual resolutions are almost identical on their face, but when you read them in the context of each proponent’s institutional mission and supporting statements, the proposals are diametrically opposed. The company was concerned about potential voter confusion. What if they both passed? The voting results settled things. The more “progressive” proposal received over 60% support. That level of support strongly compels the company to respond. The “conservative” proposal received less than 3% support. That means it doesn’t even qualify for resubmission this year.
My advice on how to handle the anti-ESG proponents: Let them have their 500 words in the proxy statement, give them their three minutes at the annual meeting, and let them get their 3% support. Then, the company can move on.
Companies Have Embraced ESG and Will Continue to Do So. Another reason to stay the course and stay focused on the business case and investment thesis on ESG: Companies have embraced ESG and will continue to do so. Despite the backlash from politicians, corporate leaders are not pulling back. In fact, corporate leaders continue to lean into ESG. My former colleagues at The Conference Board regularly conduct surveys of CEOs. In their latest survey, they asked US CEOs:
(1) whether an ESG backlash will have a significant impact on their company’s ESG spending in 2023. More than 70% said “No.”
(2) about their top Social Priorities for 2023. They said: (i) economic opportunity, equality, and security; (ii) gender equality; and (iii) racial equality. In other words, Diversity, Equity, and Inclusion, or “DEI.”
Even Non-Woke Companies Have Embraced ESG… and DEI. One could argue that the CEOs’ embrace of ESG and DEI is a result of (1) the CEOs themselves being part of the liberal establishment; and (2) extreme leverage being exercised by the largest asset managers like Larry Fink and corporate titans like Jamie Dimon. This is a popular narrative in the anti-ESG Political Theater: Larry Fink and Jamie Dimon are “woke.” But, based on what I see, the embrace of ESG by corporate America is so wide that even non-woke companies have embraced ESG… and DEI.
Peabody Energy’s 2023 ESG Report starts with a letter from the CEO saying in the first paragraph:
our commitment to sustainability shapes Peabody’s strategy for the future including supporting our stakeholder needs, practicing operational excellence, and championing ESG practices (emphasis added).
Reynolds American’s Diversity & Inclusion web page states that it has:
plans in place to reach gender parity in management roles and to have 25% minority representationin management roles [by 2025] (emphasis added).
Smith & Wesson’s board has a standing ESG committee. Only 5% of public company boards have an ESG committee.
Those are public companies. Here are some private companies that are out of the reach of Larry Fink:
Chick-Fil-A’s website talks about the company’s “Green Team,” which strives to:
cultivate a ‘green’ mindset across the business by encouraging colleagues to incorporate sustainability into all aspects of life (emphasis added).
It also talks about “embedding Diversity, Equity & Inclusion in everything we do.”
On the Koch Industries website, there is a note signed by conservative mega-donor Charles Koch that says:
We stand with those who are peacefully speaking up and acting constructively to remove the barriers that persist in our society, including barriers that institutionalize racism and unjustly hold so many people back… It’s up to each of us to face these systemic problems that leave so many behind” (emphasis added).
Different Actors With Different Endgames
I’m going to close by reiterating that it is critically important for you to help your boards understand that they are fighting a war on two fronts. You and your boards need to recognize the difference between the two, focus on the first, and do not get distracted by the second.
It comes down to recognizing that there are different types of actors with very different endgames and incentives. The overarching interest of investors is sustainable business results. Investors exist to grow the value of their investments… investments in your companies. The overarching interest of politicians is near-term election results. Their primary motive is getting re-elected. What they are doing to achieve that today has little to do with business or investment performance.
To loop this back to where I started today, companies have many stakeholders. Politicians are one among them, but more remote than others. And politicians don’t hold a candle to the board, shareholders, and management—the actual deciders who control what happens at companies. I’ve explained today that both shareholders and management are seeing the distinction between the two fronts of the ESG war and are planting their boots firmly in pro-ESG soil. It’s part of your jobs to make sure your boards are seeing that and acting in the best interests of your companies.
 Public Law 107-204, 116 Stat. 745
 Public Law 111-203, 124 Stat. 1376
 MESSAGE TO THE HOUSE OF REPRESENTATIVES—PRESIDENT’S VETO OF H.J. RES 30 (MAR. 30, 2023)
 U.S. Constitution, Artl.S7.C2.2 Veto Power
 H.J. Res. 30, 118th Congress (2023-2024)
 87 Fed. Reg. 73822 (Dec. 1, 2022)
 29 U.S.C. 1001 et seq.
 The Global Compact, “Who Cares Wins: Connecting Financial Markets to a Changing World” (2004)
Ethan Rouen and Kunal Sachdeva and Aaron Yoon, “The Evolution of ESG Reports and the Role of Voluntary Standards” (Sep. 23. 2022)
 Jon Hale, “What Are Sustainable Funds and How Have They Performed?” Morningstar Investing Trends (Jan. 31, 2018)
 Morningstar Manager Research, Sustainable Funds U.S. Landscape Report (Feb. 21, 2023)
 “Woke,” Merriam-Webster.com Dictionary
 U.S. Congressman Andy Barr, Press Release: “Barr and Allen Introduce ESG Act to Protect Investors and Preserve Access to Capital for Energy Producers” (Mar. 18, 2022)
 Governor Ron DeSantis Press Release: “Governor Ron DeSantis Announces Legislation to Protect Floridians from a Federally Controlled Central Bank Digital Currency and Surveillance State” (Mar. 20, 2023)
 Julie Bykowicz and Angel Au-Yeung, “Conservatives Go After ESG Investing in ‘Woke’ Battle,” The Wall Street Journal (Feb. 28, 2023)
 Governor Ron DeSantis Press Release: “Governor Ron DeSantis Further Prohibits Woke ESG Considerations for State Investments” (Jan. 17, 2023)
 Victoria Marshall, “Kevin McCarthy Signs Bill Killing Biden’s ESG Rule For Retirement Plan Investments,” The Federalist (Mar. 9, 2023)
 Kentucky.gov Press Release, “Treasurer Allison Ball Announces List of Restricted Financial Companies” (Jan. 3, 2023)
 Letter from Betty Pendergrass, Chair, County Employees Retirement System, to Allison Ball, Kentucky State Treasurer (Feb. 13, 2023). This quote and citation are corrected from the speech as delivered on April 11, 2023.
 Indiana Legislative Services Agency, Office of Fiscal and Management Analysis, Fiscal Impact Statement, LS 6994, Bill Number: HB 1008 (Feb. 4, 2023)
 “Maximizing Americans’ Investments, Not Promoting ESG Agenda Should Be Biden’s Focus” (Mar. 6, 2023)
 PwC, “Asset and wealth management revolution 2022: Exponential expectations for ESG” (2022)
 Leslie Norton, “10 Reasons Why ESG Won’t Be Stopped,” Morningstar magazine (Nov. 7, 2022)
 Johnson & Johnson 2022 Notice of Annual Meeting & Proxy Statement (Mar. 16, 2022)
 Letter from Marc S. Gerber, Skadden, Arps, Slate, Meagher & Flom LLP to U.S. Securities and Exchange Commission, Division of Corporation Finance Re: Johnson & Johnson—2022 Annual Meeting, Omission of Shareholder Proposal of Mercy Investment Services, Inc. and co-filers (Nov. 30, 2021)
 Johnson & Johnson, Current Report on Form 8-K (Apr. 29, 2022)
 Rule 14a-8 under the Securities Exchange Act of 1934, as amended, Paragraph (i)(12) Resubmissions. This proposal would not have qualified for resubmission under the rule’s lower threshold of 3% that applied before the rule was amended effective January 1, 2022.
 The Conference Board, “C-Suite Outlook 2023: On the Edge: Driving Growth and Mitigating Risk Amid Extreme Volatility” (Jan. 12, 2023)
 Peabody 2023 Environmental, Social, and Governance Report
 The Conference Board-ESGauge, Corporate Board Practices Dashboard (2023)