The End of ESG

In the face of heavy criticism, U.S. executives are backing away from their emphasis on ESG (environmental, social and governance issues).

Hands holding globe

Farewell, ESG. We hardly knew ye.

ESG (an emphasis on environmental, social and governance issues) has struggled to take shape, and both Fortune and the Wall Street Journal pretty much declared it dead in the U.S. in the past week. (It continues strong in Europe.)

The fading of ESG will have broad implications for insurers. They'll start with coverage for the directors and officers who have had to wrestle with ESG considerations and will extend more subtly into many other lines by affecting how clients run their businesses and how they invest.

A Fortune columnist described the backlash against ESG on Thursday, writing:

"In the U.S., ESG detractors have basically won.... A full half of Fortune 500 CEOs now believe ESG issues are 'unduly impacting business decisions.' And that sentiment is trickling down to the chief sustainability officers in charge of ESG. Participants in a Fortune Impact Initiative call on Tuesday, which took place under Chatham House rules, admitted as much. 'We don’t talk about ‘ESG’ anymore,' and 'the term [ESG] does get in our way' were common refrains."

Another Fortune columnist weighed in Friday:

"The practice of speaking out on controversial social and political issues, which reached a peak after the killing of George Floyd [in 2020], is receding in C-suites.... And expectations that the Supreme Court may soon strike down affirmative action programs at Harvard and the University of North Carolina will undoubtedly lead to challenges for corporate DEI [diversity, equity and inclusion] initiatives."

The Wall Street Journal reported this on Monday: 

"Companies’ mentions of green and social initiatives during earnings calls have fallen off sharply in recent quarters, reversing a more boastful approach taken over the past few years amid intensifying pressure from some investors and conservative activists."

ESG always struck me as an ungainly agglomeration of ideas. They're all important, in their own right, but they didn't cohere, at least in my mind.

What do you do when Tesla stands out on the environment piece because of its electric cars but CEO Elon Musk is repeatedly investigated by the Securities and Exchange Commission on governance issues? Unable to decide, S&P removed Tesla from its ESG Index a year ago.

Major consulting firms have tried to help clients implement ESG practices, but the methodologies aren't pretty. One showed me an overview that was almost 200 slides, incredibly dense with text and graphs and flow charts. 

With the term under attack in the U.S., ESG will split back into its component parts.

The "E" will see the least impact, because so much momentum has built for facing up to the environmental problems that climate change is causing. Certainly, insurers don't need to be convinced about how climate change is increasing the number and severity of natural catastrophes.

The Fortune columnists said that, despite the general pushback on ESG, they saw no evidence that companies were backing away from their ambitious goals for reaching net-zero. And there are vast profits to be generated from mitigating the effects of climate change, so even the hard-core capitalists are motivated. Think of the trillions of dollars that will be spent rewiring the world's electric grids to incorporate all the renewable energy that is being added. Or, getting down to the micro level, think of all the retrofitting of homes and buildings that will be done to make them more energy-efficient and of all the furnaces, water heaters, etc. that will be swapped out and replaced with electric versions so we stop burning so much natural gas.

The "S" will take the biggest hit, in my view, because companies are seeing that making even a modest stand on social issues can create a backlash. Bud Light runs an ad with a transgender influencer and suddenly faces a boycott from a meaningful percentage of customers. Same for Target when it carries some merchandise related to Pride Month. Disney merely expresses disagreement with a Florida law about schools that's come to be known as Don't Say Gay, and the governor tries to revoke the status the company has long had as one of the biggest employers in the state. Even Chick-fil-A, long a darling of the Christian right, stirred up talk of a boycott merely by appointing a vice president of diversity, equity and inclusion.

I'm not sure companies will back off that much. After all, they have to cultivate a broad base of customers, not just those who are offended by a transgender influencer or a Pride T-shirt. Disney, for instance, was facing pressure from customers and employees to say something about the Don't Say Gay law, and those opposing the bill felt Disney was, in fact, much too slow and mild with its criticism. Companies claim to have values and have to stand up for them, even in the face of some backlash, if they're to have credibility with employees and customers.

I do think companies will err on the side of caution in speaking out about social issues, at least for a while. But I don't suspect that companies will back away from their DEI initiatives internally. Even those hard-core capitalists see the need to tap into new pools of talent, given the low unemployment rate and, at least in the case of the insurance industry, a wave of impending retirements. Besides, DEI is just the right thing to do.

The "G" shouldn't change much. Governance issues have always been there and always will be. I just think the "G" will be severed conceptually from the "E" and the "S." 

Some insurers, given their massive investment portfolios, might be affected if Republicans succeed in their various efforts to ban "woke" investing based on ESG principles that go beyond straightforward evaluations of financial returns. But some form of what's been called "social investing" has been around at least since the 1960s, so I don't think the notion will be totally vanquished.

A complication is that Europe is still full speed ahead on ESG, so multinational firms will have to comply with laws there, just as Google, Meta and other tech giants have had to adhere to privacy laws — sometimes after massive fines.

But in the U.S., ESG seems to be disappearing as an overarching consideration. That could simplify some issues for coverage for directors and officers, though reputational concerns related to social issues will be complex. 

Meanwhile, the need to help the world limit climate change while adapting to its near-term consequences will continue to provide huge opportunities for forward-thinking insurers.