The US fight over ethical finance

The anti-ESG movement in the U.S. has gained significant momentum, particularly during the 2023 and 2024 proxy voting seasons. According to recent reports, such as those by Harvard Business Review and Responsible Investor, the movement has been marked by an increased number of shareholder proposals targeting ESG issues, with many of these proposals being actively opposed by anti-ESG factions. This opposition is not only concentrated in shareholder meetings but has also manifested in legislative actions and public campaigns against ESG principles.

Efforts to counter ESG investments have been particularly visible in the legislative arena. For instance, New Hampshire Republicans have proposed extreme measures, including the possibility of prison sentences from 1 to 20 years, for asset managers who prioritise ESG factors in their investments. This proposal is part of a wider pattern where state legislators are introducing bills to restrict or penalise ESG-focused investments. Moreover, efforts to combat ESG have not been limited to legislative proposals. Influential political figures and organisations have been actively working to discredit ESG practices.

The backlash against ESG has led to several notable boycotts targeting asset managers who embrace sustainable finance. These boycotts are frequently initiated by political activists and organisations opposed to ESG policies. For example, groups have mobilised against firms that have divested from fossil fuels or adopted social justice-oriented investment strategies. These campaigns argue that such practices align too closely with political agendas or harm certain industries, contributing to their popularity among anti-ESG activists.

In March 2024, the SEC finalised rules to standardise climate-related disclosures for public companies but significantly scaled back the proposal by excluding the contentious Scope 3 GHG emissions reporting. Instead, the rules require phased disclosure of Scope 1 and Scope 2 emissions for large and accelerated filers only when material. This reduction in the SEC’s climate disclosure rule disappointed both pro-ESG and anti-ESG advocates. Pro-ESG supporters expressed concern over the lack of a requirement for Scope 3 emissions, while anti-ESG proponents criticised the very existence of a climate-related rule.

After the rules were adopted in 2024, several lawsuits from anti-ESG petitioners were filed prompting the SEC to delay enforcement pending judicial review. One of these anti-ESG petitioners is the well-known, albeit controversial, “National Center for Public Policy Research” (NCPPR). In 2023, at DPAM, we observed that this proponent exclusively submits anti-ESG proposals to be voted at General meetings of some U.S. companies. Notably, in the case of Visa Inc, the NCPPR submitted a proposal which aims to separate the CEO and Chairman roles, which, at first glance, seems in line with governance best practice. Nevertheless, we withheld our support for the proposal as it became apparent that the proponent was orchestrating a broader campaign against Visa's CEO with ulterior motives. This included urging Visa Inc to retract its endorsement of Black Lives Matter. NCPPR also called for the cessation of health insurance coverage for transgender employees, among other actions.

The petitioners like the NCPPR claim the SEC exceeded its authority, arguing that the rules impose a new regulatory regime focused solely on climate change, violating the First Amendment and bypassing Congressional approval. They argue that the SEC’s mandate focuses excessively on non-financial climate disclosures, which they view as unrelated to investor protection.

The SEC counters that it acted within its statutory authority, designed to protect investors by requiring the disclosure of material risks, including climate risks. The agency highlights that its historical authority allows it to mandate disclosures beyond financial data when relevant to investors. The SEC maintains that climate-related risks can impact financial performance, making the rules vital for transparency and consistent reporting.

Despite the backlash against ESG investing, there remains strong and ongoing commitment to responsible investment, including in the US. While media coverage often highlights political opposition to ESG in the US, PRI data shows that many organisations continue to adhere to these principles. The PRI is still attracting new signatories, with climate change and diversity, equity, and inclusion (DEI) being key ESG priorities, especially for US signatories. North American signatories are making progress in their ESG practices, although they generally make fewer public disclosures on responsible investment compared to those in Europe, Oceania, and Asia. For example, the percentage of North American signatories identifying sustainability outcomes increased from 58% in 2021 to 71% in 2023.

In recent years, the US has witnessed a growing criticism against Environmental, Social, and Governance (ESG) investing. This shift has been characterised by a rise in anti-ESG sentiment and actions, including efforts by some investors to challenge and block ESG-related shareholder proposals. The movement reflects broader political and social tensions regarding sustainable finance and corporate responsibility. But does it hold any truth? And what’s fuelling this backlash?

• Information deficit: A key driver behind this movement is the general public's lack of understanding of ESG. A recent survey by Global Strategy Group reveals that only 22% of Americans have a good understanding of ESG principles—which can contribute to the effectiveness of anti-ESG campaigns, as misinformation or incomplete knowledge about ESG can shape public opinion and influence policy decisions.
• Economic reasons: To ESG opponents, prioritising extra-financial factors distracts from a company's primary goal of maximising shareholder value. Critics argue that ESG initiatives impose additional costs on businesses. This particularly affects energy intensive industries, where ESG-driven divestment could reduce investments and lead to higher costs.
• American protectionism: There is also a concern that ESG initiatives could undermine American competitiveness, which feeds into a broader narrative of American protectionism. Critics argue that while the US excels in traditional energy sectors, the focus on renewable energy (often imported from China) could weaken the country's economic position.
• Political and ideological reasons: Finally, there’s a clear divide along political lines. Democrats typically support ESG, arguing that long-term sustainability is vital for economic stability. Republicans, on the other hand, generally oppose ESG, citing government overreach and viewing it as a form of "woke capitalism" that imposes liberal values on businesses and undermines free markets. The political divide reflects broader ideological differences between the two parties regarding the role of government, regulation, and corporate responsibility.
• Defer, delay, postpone: This backlash is further exacerbated by the tendency of political leaders or institutions to delay meaningful climate action. Often, this happens by shifting responsibility elsewhere—onto future administrations, other countries, or even individuals. This can manifest in arguments that future technology will solve the problem of climate change, or that more studies are required before making significant changes, which then justifies the postponement of action.

But do these arguments hold any weight?

As mentioned, one of the primary debates surrounding ESG investment is the concern that incorporating non-financial elements in investment decisions might lead to a diminished focus on performance. However, we shouldn't forget that the concept of return can’t be dissociated from the inherent risks linked to the investment. Higher risk investments should offer higher returns, and that for any given expected return, rational investors should prefer the safest alternative.

To assess the risks of equity investments, understanding the relationship between a company and its stakeholders is essential. Key ESG factors—such as how a company sources raw materials or manages employee relations—play a direct role in shaping its risk profile.

The materiality of ESG risks is further underscored by the mandatory disclosures public companies must file annually, where environmental and social risks often rank among top concerns. And these risks are far from hypothetical; poor ESG practices can have tangible and lasting effects on a company's cash flow and reputation. According to a 2019 Bank of America study, ESG controversies cost S&P 500 companies over half a trillion USD between 2014 and 2019.

Neglecting ESG considerations often leads to an underappreciation of the investment risks, which can threaten long-term returns. The question of the financial impact of ESG controversies is key, given that any dollar used to compensate for bad externalities or litigation can’t be used for reinvestment purpose or be given back to investors, therefore impacting value creation.

In an ironic twist, the companies the most exposed to ESG risks are often the ones with strong cash flow generations. This is why dividend-paying companies are often at the heart of the debate. Dividend companies have historically skewed toward mature and cash flow generative industries such as oil & gas, pharmaceuticals, consumer discretionary, which tend to be the most exposed to the ESG debate in the US.

Despite this consideration, dividend companies are often well positioned to leverage ESG opportunities. Dividend companies, thanks to their more mature and cash generating profile are often on top of any new ESG investment and can invest quickly substantial amount of money into new sustainable opportunities, which tend to also represent non negligible growth opportunities.

For example, Graphic Packaging, a major player in paper-based packaging, has invested heavily in recycled packaging solutions, enabling a shift away from plastic for food and beverage companies. This approach has spurred the company's growth relative to its peers while ensuring steady returns to shareholders.

It’s true that ESG issues are highly politicised in the US, often aligning with changes in administration between Democrats and Republicans. This creates uncertainty around the long-term regulatory landscape for ESG and the timing of policy implementation. However, economic opportunities and access to lower-cost financing are likely to continue to drive corporate ESG engagement. Sustainable projects often benefit from incentives such as green bonds, favourable financing terms, and government subsidies, further motivating businesses to pursue ESG-related initiatives.

Moreover, growing consumer and international investor demand for sustainable products and services is placing additional pressure on companies to improve their ESG performance. As a major global economic actor, the US will play a pivotal role in the transition to a more sustainable world. Its vast consumer market, innovative capacity, and economic centrality make it a key driver in the global sustainable transition. While the political shifts between Republican and Democratic administrations may slow this transition, they are unlikely to stop it entirely.

Learn more about the drivers behind the anti-ESG movement in the second part of this article: 'Why is the US pushing back on ESG?'

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