What’s behind the current global backlash against ESG and what does it mean for Australian company directors in the first instance, and then for super funds investing in those companies? Do directors need to care about ESG anymore?
First, a bit of housekeeping. By ‘ESG’, we mean policies that take account of environmental, social and governance impacts, including diversity, equity, and inclusion (DEI) goals. Second, while the ESG backlash is happening primarily at a corporate level, it has implications for super funds that invest in those companies.
It’s hard to identify a singular objection underpinning the ESG backlash. Instead, we have discerned four main categories of objection. They run along a spectrum from the economic to the populist or cultural. You could even play ‘Backlash Bingo’ once you are able to identify the different rhetoric used to articulate each type of objection. Perhaps your favourite AI transformer could be pre-trained to help with this, but we digress. Back to the four categories.
First on the spectrum is a bundle of concerns – let’s call them cost and burden objections that are principally economic. These concerns coalesce around the idea that implementing ESG initiatives is just too costly and resource intensive. Mandatory climate reporters, for example, point to the Explanatory Memorandum for the legislation passed last August. It included an estimate that the average incremental cost of reporting each year for the next 10 years was $1m to $1.3m. As well as cost and burden, words you will hear in this context include: ‘expensive’; ‘inefficient’; ‘uncompetitive’.
The next group of objections echo Milton Friedman’s view that the primary responsibility of a company is to maximise shareholder value. Contemporary adherents to this view believe that ESG initiatives conflict with this goal, but their concerns are nonetheless ideological. You will hear words like ‘shareholder return’, ‘stick to knitting’, ‘distraction’, and ‘misalignment’ from this quarter.
Those in our third category contend more simply that any additional environmental or social regulatory burden is unjustifiable per se. This veers even more to the ideological, perhaps leaning to libertarian. ‘Box ticking’, ‘unnecessary government intervention’ and ‘green tape/red tape’ are the kinds of words you hear. Through this lens, something like mandatory climate-related financial reporting is just green tape to be ‘slashed’ or a ‘shackle’ to be thrown off.
Lastly, there is the purely populist or cultural aspect to the ESG backlash. This stems from a range of factors: marginalisation of blue-collar workers and resulting income inequality, economic frustration, and a general resistance to change. Populism often seeks an ‘other’ to rally against, and ESG initiatives seem to have become that target because they can be identified as ‘woke’ or things peddled by ‘elites’. In this narrative, elites are to blame for the complainants’ marginalisation. Objectors here, particularly in the US, are prone to using expressions like: ‘lunatic left’, ‘woke capitalism’ and so on.
While the backlash is certainly ‘real’ and purposeful in human or political terms, the physical and social sciences still point the other way. Has climate risk and opportunity gone away because a new administration in the United States has said it has? No. Company directors do still need to care about climate risk and opportunity as do super funds. Global greenhouse gas emissions are still heating up the planet. Well-directed companies that want to be sustainable in that world still need to grapple with the risks and opportunities that arise, whatever happens in the White House. Super funds will want to ensure that they are investing in companies that are on the right side of those risks and opportunities.
So where does this leave company directors? We think they can distil the answer into three essential lessons.
First, they must be satisfied that their chosen course of action is in the best interests of the company and gather evidence to support that view. If the evidence doesn’t support the strategy, they must recalibrate!
Second, they should engage with the relevant stakeholders on ESG issues. Open and transparent communication with stakeholders is vital. This includes investors, but also employees, customers, local communities, and regulators.
Third, they need to stay informed and adaptive. The ESG landscape constantly evolves. Directors should watch stakeholder expectations, regulatory trends, and best practices. The obligation of care and diligence is not passive. It requires an understanding of the subject matter and an active application of their independent judgment. Are the company’s approaches to social and environmental issues fit for purpose and do they reflect emerging risk areas? They absolutely shouldn’t just aim for compliance.
Qantas Chair, John Mullen, recently noted the winding back of some ESG initiatives but expressed the view that mainstream DEI and ESG initiatives have largely been shown to improve performance and add value to corporations. This was his advice to company directors about what to do in the wake of the ESG backlash:
“Don’t be radically woke but don’t be radically anti-woke either. Just do what you think is right and stick to it.
And always, as a director, be prepared to make a decision that differs from your personal conviction if it is the best thing for the company.”
Super funds should be watching closely how their portfolio companies approach ESG issues in this ‘backlash era’. With their elevated stewardship function and the longer time-horizons involved, super funds should be on the lookout for signs of boards ‘flip-flopping’ on their approach to ESG.
