The Cabaret tune “Money Makes the World Goes ‘Round” is cynically evoked to explain environmental maleficence, but it can alternatively be applied to achieving sweeping carbon reduction objectives, as corporate behavior can be a powerful force for good. Adoption of clean energy, waste reduction, and other sustainable behaviors are fundamental to climate mitigation, and thus incentivizing these actions through corporate Environmental, Social and Governance policies can be effective. But despite the SEC’s progress in bolstering and codifying ESG disclosure, the gears of the financial world may be going counterclockwise: progress on improving reporting and actively promoting ESG is under attack and turning in reverse.

In April’s newsletter, we called out how politicizing ESG criteria and divesting from companies and fund managers that incorporate ESG criteria is counter to the investor’s and the public’s interest.  Now there is additional evidence these maligned practices and policies are dampening the use of ESG metrics, thwarting progress toward sustainable and ethical business behavior.  Data from the Sustainable Investment Institute shows that well-funded anti-ESG groups have supported a record number of shareholder proposals removing ESG criteria from corporate operating objectives. Year to date in 2023, 68 anti-ESG proposals have been filed, compared to 45 in all of 2022. About a third of the proposals focus on diversity policies, a hand full related to net zero or decarbonization goals, and two ask companies to avoid public policy positions unless there is a business justification. Is the latter the umbra of the DeSantis versus Disney battle?

Leading financial institutions, including JPMorgan, Blackstone, and BlackRock have responded by downplaying their ESG commitments, including not alluding to them in public communications. However, others fearful of reproach from Republican lawmakers have reversed course.  At the end of 2022, Vanguard Group, the world’s largest mutual fund manager dropped out of the Net Zero Asset Managers (NZAM) initiative, a global climate initiative organized by the financial sector. The NZAM, which has $66 trillion in assets under management and 291 signatories worldwide is a respected leader in sustainable investing, and Vanguard’s explanation of “demonstrating independence” in decisions alludes to a weakness in commitment. A statement claiming the move “will not affect our commitment to helping our investors navigate the risks that climate change can pose to their long-term returns” speaks to the risk-reduction benefits of addressing climate-related business disruptions. It does not however offer a pledge to solve the underlining driver of these risks, which is mitigating greenhouse gas emissions.

If the recent backlash on ESG reporting and investment is just a short-term battle in the cultural war being waged in on numerous fronts in the US, then we can “lay low” as the fervor peaks and subsides.  The ESG market segment continues to grow in Europe, and depending on its economic performance through this turbulent period, critics may have to silence their rhetoric on ESG undermining shareholder returns. Underperformance, however, despite recessionary trends, will fuel rebuke of ESG tenets and shift money away from companies and funds that incorporate social responsibility into their practice. And as the song says, without money a sustainable verdant world won’t go ’round.