How boards are responding to investor and political pushback on ESG goals

The legislative kerfuffle around ESG has been brewing for years, with actions swinging drastically depending on which party is in charge. Under the Trump administration, the U.S. left the Paris climate agreement. Just a few years later, under Biden, the Inflation Reduction Act was signed into law, billed as the most consequential climate legislation in U.S. history owing to tax credits and incentives meant to help companies address climate change. On the state level, Florida is leading the charge with 18 other states in a movement against ESG investing.

“Boards have some really tricky issues to negotiate,” says David H. Webber, professor of law at Boston University and author of The Rise of the Working-Class Shareholder: Labor’s Last Best Weapon. “At the end of the day, companies are going to have to ask themselves: ‘Who are my customers? Who are my investors? Who are my employees?’”

In recent years, shareholders, consumers, and employees have pushed companies to address larger societal issues. This movement accelerated in the wake of the 2007–08 financial crisis, when governance changes became a key focus. Issues such as corporate political spending, the pay ratio between CEOs and their workforce, and splitting the CEO and chairperson roles were all top of mind for corporate boards, a shift from decades of passive investing by shareholders. 

More recently, the “E” and “S” have come into greater focus. This has mostly been led by the increased financial might of the millennial and Gen Z generations. These groups are prioritizing concerns about diversity, equity, and the environment, influencing where they work, which brands get their money, and even their investment strategies. Today, millennials and Generation Z account for nearly half of the U.S. workforce, with spending power estimated at $2.5 trillion. 

“We are seeing boards get much more involved,” says Cheryl D’Cruz-Young, senior client partner of the ESG Center of Expertise at Korn Ferry. “The interest level is much higher than it was just a few years ago. The understanding and education at the board level is at a higher level.”

But the anti-ESG backlash has largely been driven by the energy industry, says Webber. Many southern states, like Texas, are particularly worried about job creation for the oil and gas sectors—and any perceived economic hit that could occur as investments flow in a different direction amid a global energy transition that’s well underway.

“Boards don’t have an easy job ahead of them in the coming years, but ultimately, boards are going to be responsive to incentives,” says Webber. He points out that states with the largest public pension plans—California, New York, Illinois, and Massachusetts—are all very supportive of ESG investing. “There’s just more dollars out there on the pro-ESG side,” he notes.

Inflows into sustainable funds soared from $5 billion in 2018 to more than $50 billion in 2020 and then to nearly $70 billion in 2021, according to McKinsey. More than 90% of S&P 500 companies now publish ESG reports in some form.

Advocates say anti-ESG efforts could cost states millions. A study commissioned by Ceres, As You Sow, and the Sunrise Project found that taxpayers across six states—Kentucky, Florida, Louisiana, Oklahoma, West Virginia, and Missouri—could face more than $700 million in additional interest charges on municipal bonds as a result of anti-ESG actions.

Individually, executives may fret about the changing tide against ESG because of their own self-interest. Danone’s Emmanuel Faber and Unilever’s Alan Jope both faced criticism for their efforts to create purpose-driven organizations, and their exits could be, in part, connected to too much focus on ESG. But on the flip side, failures to align with the purposeful aspirations of ESG led to the departures of top executives at Nike, Uber, Papa John’s, and CrossFit.

“We can’t stitch a suit that’s too tight,” says Nikita Singhal, managing director and co-head of sustainable investment and ESG at Lazard Asset Management. “ESG issues that matter to one company can be completely different from ESG issues that matter to another company.” 

Analysts who track health care companies, as an example, would need to consider product safety, the access and affordability of pharmaceuticals, and net pricing legislation as some ESG-related issues for that sector, while for tech, the importance of responsible content or consequential government regulations in the U.S. and China would be among the top issues of concern. Singhal says ESG is very contextual, varying by region and sector. 

“We are still in the very early days of ESG, relative to the history of financial markets,” says Singhal. She adds it shouldn’t be conflated with faith-based investing, which has existed since the 1700s. “ESG is about discovering and pricing E, S, and G risks and opportunities. It is very nascent.”

Ultimately, Singhal says, “if the boards are well educated and have people on the boards who have sustainability expertise, then they can have the conviction to tell investors, ‘I don’t need to report on 150 different measures of ESG.’” Instead, she says, sustainability experts can explain to their board: “‘Here are the top three things that matter to our business that are financially important and, therefore, are also the three biggest ways we can have a positive impact on our communities.’”

“ESG just makes good business sense,” says Karthik Ganesh, CEO at pharmacy benefits manager EmpiRx Health. Prioritizing health equity and a diverse workforce have also been core to EmpiRx Health’s business model, says Ganesh, helping it retain nearly all customers it pulls in because the company looks, thinks, and talks like its clients and patients. “They understand that empathy is innate in the way we operate and build ourselves.”

“We are very much in an era of stakeholder capitalism,” says D’Cruz-Young. “So how are corporate leaders thinking about these commitments? From our perspective, they are upskilling the CSO [chief sustainability officer] role.” 

Amid a looming recession, activists pressing ESG concerns, the federal-state disagreement over ESG investing, and proposed new disclosure rules by the SEC, Korn Ferry says CSOs need to build a closer relationship with their CEOs and CFOs to succeed.

“It is vitally important that the structure is correct for the organization,” says D’Cruz-Young. “That the CEO is engaged and that the board is engaged for the long term. Because this is all about long-term, sustainable value.”