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On an individual level, most people will agree that actions which favor environmental sustainability, respecting and preventing harm to people, and responsible oversight of policies and initiatives are positive values.
However, the sentiment quickly becomes more complicated when it comes to who should be focusing resources toward this perceived greater good, especially when there may be tradeoffs. Businesses and investment funds are popular targets if profits and corporate responsibility appear to be at odds.
Nowhere is this standoff more visible than in the United States where, over 150 anti-ESG bills and resolutions were introduced across 37 states in 2023. Many of the bills focused on blocking government-controlled investments, such as state pension funds, from considering ESG factors when choosing where to invest, with the argument that incorporating non-financial metrics into investment decisions breaches fiduciary duty to bring the most profit to shareholders.
Though many of the resolutions did not pass, the impacts of this backlash have been apparent. Large financial firms have watered down their climate-related positions and backed out of groups like Climate Action 100+ that galvanize support from different groups to combat climate change.
Nevertheless, the prevailing sentiment remains that ESG measurement and disclosures will continue to be relevant across various stakeholder groups including customers, international regulators, insurance companies, and investors.
Firms may feel they are facing a dilemma when pursuing sustainability goals for fear of political retaliation; however, it’s important for them not to pause or roll back progress they have made. Businesses may ultimately need to balance how they will focus their ESG-related initiatives with political scrutiny, while ensuring compliance and maintaining progress on long-term goals.
Here are several ways to manage your ESG program during uncertain political climates.
Focus on tangible requirements first
One of the most compelling reasons to maintain or enhance your ESG program is to meet the demands of regulators and customers.
While major sustainability disclosure laws in the US continue to take shape, jurisdictions and countries elsewhere have begun to enact major regulations where penalties will potentially have material impacts on companies that do not comply.
The CSRD and SFDR in the European Union tend to get the most international attention (especially with predictions that the full scope of CSRD will affect over 50 000 companies) but other major economies like the UK, Japan, and Australia also have burgeoning disclosure regulations.
Although penalties are not yet known, affected companies will not want their names in the headlines when the first penalties are inevitably levied. If your company is affected by such regulations, no sane-minded politician will come after you for complying with regulations to avoid fines.
Impacts of disclosure regulations are also felt along supply chains and through investments. It’s common to see requests for ESG-related details in supplier questionnaires and scorecards in business-to-business relationships as part of compliance measures.
As part of their corporate values, companies may also have other initiatives that engage their supply chains for climate-related disclosures such as Walmart with its Project Gigaton. Project Gigaton is one of the largest private sector consortia of its kind and just celebrated reaching the goal of reducing, sequestering, or avoiding 1 billion metric tons of GHG emissions six years earlier than targeted.
Many other corporate programs like Project Gigaton, albeit at smaller scales, exist and engage their partners as well; therefore, staying compliant with customer demands is also a defensible reason for investing resources in ESG at your business.
Align goals and initiatives to your company’s core business or values
Another way to manage your ESG program in the face of political uncertainty is to align your goals and initiatives to your own company’s core business or values. By linking your ESG program to your mission, vision, and values, you can show how it supports your long-term strategy, enhances your competitive advantage, and creates value for your shareholders and society.
For example, it would be in a marine equipment manufacturing company’s interest to ensure its supply chain does minimal damage to marine ecosystems and to support causes for reducing ocean pollution or donating to water-related charities.
If your company is in the health care industry, you can highlight how your ESG program improves the quality and accessibility of health care services, and promotes the well-being of your employees and communities.
By aligning your ESG program to your core business or values, you can also leverage your existing strengths, capabilities, and resources to achieve your ESG objectives with less scrutiny.
Keep capital in mind
Even if some political actors or groups are opposed to or skeptical of ESG issues, the reality is that banks, insurance companies, and investors are still evaluating ESG risks and opportunities when making their financial decisions.
ESG factors can affect the cost and availability of capital, the valuation and performance of assets, and the reputation and trustworthiness of companies. Therefore, it is important to understand and communicate how your ESG program affects your financial position and prospects, and how it can help you access new sources of capital, reduce your risk exposure, and enhance your returns.
For instance, you can use ESG standards and frameworks, such as the Sustainability Accounting Standards Board (SASB) or the Task Force on Climate-related Financial Disclosures (TCFD) to measure and report your ESG performance and impacts in a consistent and comparable way. Disclosing ESG metrics along established guidelines like SASB and TCFD will help if your company expects an ESG rating from groups like Sustainalytics, ISS, and MSCI.
Moreover, you can explore opportunities to tap into the growing market for sustainable finance, such as green bonds, social bonds, or sustainability-linked loans, which can offer lower interest rates or incentives for meeting certain ESG criteria.
Material risks are part of your fiduciary duty
As a company, you have a legal and ethical obligation to act in the best interests of your shareholders, and to protect and enhance the value of your assets.
This means that you have to identify, assess, and manage the risks that could affect your business, including those related to ESG issues. Ignoring or downplaying these risks could expose you to legal liabilities, operational disruptions, or reputational damage, and could ultimately erode your shareholder value and trust.
It is therefore vital to adopt a proactive and comprehensive approach to ESG risk management, and to integrate it into your overall governance and decision-making processes. This could involve conducting regular risk assessments, developing risk mitigation and adaptation plans, establishing risk oversight and accountability mechanisms, and disclosing your risk management practices and outcomes. By doing so, you can demonstrate that you are fulfilling your fiduciary duty and acting in a responsible and prudent manner.
The top line of the balance sheet can also be affected by ESG when it comes to goodwill and brand value. Accenture’s 2023 Consumer Pulse Survey showed that 83% of respondents increased their sustainable shopping in the last 12 months and the environment was the second biggest concern for the next 6-12 months, ahead of personal financial situation.
Brand Finance launched its Brand Sustainability Index in 2023 and generated a report on The Sustainability Gap Index that analyzed the billions of dollars at risk when brands “greenwash” or “greenhush”, overstate or understate, respectively, their impacts. All factors considered, shareholder value is tied to ESG risks and opportunities.
Conclusion
Whether you are continuing to mature your ESG initiatives or just starting out, being able to demonstrate a return on your ESG investments regarding efficient data collection, integrity of disclosures, transparency of material risks, and soundness of strategy will help your business demonstrate the optimum ROI.
Organizations with ESG programs that provide the most value often use purpose-built ESG software from companies with a history in sustainability, and who continuously invest in the latest technology.
Managing your ESG program in the face of political uncertainty and potential backlash can be challenging, but it is not impossible. By focusing on tangible requirements, aligning your goals and initiatives to your core business or values, keeping capital in mind, and remembering that material risks are part of your fiduciary duty, you can navigate the complex and dynamic ESG landscape and ensure that your ESG program remains relevant, resilient, and impactful.
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