ESG: It’s Not Ideology, It’s Economics

A recent New York Times story looked at some of the new course offerings and concentrations at Harvard, Yale, and Wharton business schools, noting that they’re “stepping into the political arena.” The schools simply say curricula focused on diversity, equity, and inclusion and in environmental, social and governance factors are a response to shifting expectations of business’s role in society.

The role is nothing new. Joseph Wharton’s vision for the business school he founded in 1881 was to “solve the social problems incident to our civilization.” And while businesses often fell well short of that goal, in many cases creating new problems, the past decade has seen a marked shift. As confidence in government to solve societal issues has eroded, people look to businesses instead. The 2022 Edelman Trust Barometer, a survey of over 36,000 people in 28 countries, found that respondents believe societal leadership is now a “core function” of business, in which people place their trust ahead of governments, NGOs, and the media.

Contemporary enterprise risk management acknowledges that contributing to the health and well-being of the communities on which they depend is good for business. Corporate social responsibility (CSR) aligns companies’ business purpose and values with their social and environmental activities, creating both economic value and value for society. And while it contributes to the bottom line, CSR is also vitally important because, increasingly, stakeholders demand it.

Employees, investors, and consumers mostly applaud when companies like Coca-Cola speak out against, for example, Georgia’s new restrictive voting laws. CEO James Quincey didn’t stop after saying the legislation was wrong, vowing that Coca-Cola, headquartered in Atlanta, would advocate for its change “both in private and now even more clearly in public.” Other Georgia-based businesses, including Delta Air Lines, UPS, and Home Depot, joined hundreds of others around the country in condemning the new laws. Georgia’s threatened retaliatory boycotts never materialized, and Georgia’s lawsuit against Major League Baseball for pulling its All-Star Game from the state was withdrawn. The old “silence is golden” expectation no longer holds. Indeed, company leaders who don’t take a stand are often targeted by activists who demand some kind of response.

But while there is significant pressure from all stakeholder groups for greater transparency and authenticity, seeking to determine where companies stand and what they are doing on social and environmental issues, employee preference is a unique concern. A recent Deloitte survey of Gen Zs and Millennials—who will make up more than 60 percent of the workforce by 2025— from 45 countries found that they want to work for companies that care about the environment, and embrace diversity and inclusion practices. They will turn down jobs with companies that don’t, even if that means foregoing a higher salary. In other words, companies that ignore climate science and remain silent on societal challenges and injustices endanger their survival by limiting their ability to attract and retain the next generation of talent.

Yet despite the evidence that corporate social responsibility is good for business, expected and even demanded by every stakeholder group, there is a growing backlash that views anything but the Miltonian edict that businesses’ responsibility is to increase profits as overreach at best, and “woke” political ideology at worst. The backlash is currently most evident in efforts by Republican governors to deny the legitimacy of ESG factors when investing their states’ pension and treasury funds (witness Ron DeSantis’s recent move to pull about $2 billion from Blackrock’s management; Florida’s chief financial officer explained that it is “undemocratic of major asset managers to use their power to influence societal outcomes”).

In Texas, Greg Abbot approved two laws that bar firms from operating in the state if they stop investing in firearm firms and fossil fuel companies, denying the financial cost of climate change. As a result, the top five lenders left the Texas municipal bond market because they wouldn't support the manufacturing of assault weapons, which has in turn reduced competition. The move is costing taxpayers $300 to 500 million in extra interest this year.

JUST Capital’s cofounder and chairman, Paul Tudor Jones, notes that these anti-ESG moves are “really just to serve people’s purposes, instead of looking at the facts.” The company’s head of investor relations adds that it’s “increasingly irresponsible” to ignore ESG factors. “If you’re an asset manager focusing on oil and gas companies and you decide that you’re not going to incorporate climate risk analysis in, say, trying to understand whether the valuation of long-lived assets is reasonable or not in deciding between allocating capital to OilCo A or OilCo B, I don’t know if I’d want to leave my money with you.”

State governments may decry ESG as “woke” ideology, but for businesses, it is a reality that can only be ignored at their peril. A recent Nasdaq report shows a significant jump in the number of companies getting ESG questions on their earnings calls—from 28 percent in Q4 2021 to 49 percent in Q1 2022. The most common of these questions centers on climate transition plans. The questioners understand a simple truth that seems to have eluded the anti-ESG crowd: climate risk is investment risk.

Which brings us back to the changes happening in

business school curriculum. Educating the next generation of corporate leaders requires an exploration of risk in all its forms. Understanding and mitigating those risks is a critical task for business survival. Wharton management professor and director of the school’s ESG Initiative Witold Henisz says “good ESG risk and opportunity management is part of enterprise risk management. We don't need to recreate a new system. We don't need to start from scratch. We've learned a lot about good ERM. Just make sure ESG is part of it.”

When asked about the current backlash, Henisz says it’s about “ideology, not economics. I don't see any evidence that climate risk, for example, is going away, or it's going to have less of a financial impact in a few years.” On the other side of the backlash, he says, is “a group of people who believe climate risk is investment risk, and they want to figure out how, when, where, and for what assets. They believe figuring that out is good investing. The anti-ESG movement is saying in response, ‘we're not going to allow you figure out the links between climate risk and financial risk. It’s woke.’ That’s ideology. Whether climate risk materializes for businesses in six month or six years, the fact that it will happen is indisputable.”