The debate about ESG investing specifically—and stakeholder capitalism generally—had been hovering around the fringes of American politics for a while. But it recently moved to the very centre of American power. What happens next has transatlantic implications. ESG is becoming less politicized and more integrated into European investing practices. As the political temperature rises in the U.S., this could complicate the future for managers with employees and clients on both continents.
U.S. President Joe Biden used the first veto of his presidency to reject a law passed by Congress that would have weakened ESG investing.
ESG stands for environmental, social and governance. It was originally a lens that investors could use to analyze companies to evaluate risk-adjusted returns. The idea was that a company’s environmental footprint, labour practices and board makeup contribute to its risk profile. Therefore, investors should take all that into account.
Sounds uncontroversial, right?
ESG enters the enduring debate over fossil fuels
The controversy stems from a few sources. First, ESG investing has boomed in recent years. A 2022 PwC study puts the size of the market at $33.9 trillion (US) by 2026. A bigger business makes for a bigger target. And even though ESG covers a range of factors, it has come to be identified with decarbonizing the economy. The E seems to ring the loudest of the three letters. The debate over fossil fuels is, of course, one of the longest-running and most bitterly contested in American politics.
The ESG investing space has also become a political battlefield because it fits into a broader debate about the role of business in society. Terms like “stakeholder” and “woke” are new to the discussion, but this disagreement has been doing on for decades.
Biden’s veto is not the end of the political contest. As a result, managers and firms need to pick a side. Just not in the way you might think.
How businesses can navigate the political battle over ESG
First, remember that the 2024 elections are already underway in the US. To win their party nominations, candidates must appeal to their most ideological supporters. Conservative attacks on ESG, therefore, are more directed at these primary voters than they are at markets.
Second, remember that the momentum in favour of a growing ESG movement with more robust standards is accelerating. The world’s most powerful politician going to bat for the industry comes at the same time as the industry is moving to tighten ESG rules to prevent greenwashing.
The economy and society are moving in a direction that makes ESG considerations more relevant.
As a result, you don’t need to pick a side between left and right. You need to side with the constituencies that are important to your company. Both customers and employees are moving toward brands that can articulate a clear environmental strategy. The data are mixed on whether employees want companies to stand up on social issues; but the idea that companies should obsess over shareholders and ignore stakeholders is dead. Good governance that draws on all the talents in our diverse society benefits the entire ecosystem.
You don’t have to take up a pro-or-anti ESG banner to define your company’s values. You have to develop robust internal processes so your employees, customers and investors can tell you what they think. That lays the foundation for an authentic story about company values that can act as a guide in tumultuous times.
This post gives the views of its author, not the position of ESCP Business School.