The Anti-ESG Movement’s Dirty Little Secret: Sustainability and Social Impact Initiatives Actually Make Companies Money
As companies across the country and around the world integrate environmental, social, and governance (ESG) initiatives into their operations, an anti-ESG movement continues to grow in the United States that argues these initiatives are unnecessary, costly, and an infringement on corporate freedoms. But there is one dirty little secret these opponents ignore: ESG is often good for business.
ESG is Good for Business
One significant misconception about ESG is that it saddles businesses with added costs. But being a good corporate citizen can in fact lead to increased profitability and improved stock performance for public companies. According to a report by Morgan Stanley, sustainable equity funds outperformed their traditional counterparts in 2019, 2020, and 2021. (They marginally underperformed in 2022, largely due to the effect on short-term vs. long-term investments from increasing interest rates.) Overall, companies with higher ESG ratings have outperformed their peers in terms of stock price performance and financial performance.
Companies that prioritize ESG issues are also more resilient to market fluctuations and regulatory changes because companies that directly address material ESG issues are reducing risk. For example, a company that doesn’t reduce negative impacts on the environment may face fines or legal action for violating environmental regulations. And a company that doesn’t prioritize social justice may face reputational damage or public backlash for unethical business practices.
ESG initiatives can also improve employee engagement and retention rates, as well as enhance talent acquisition. Two-thirds of all employees expect their employer to take a stand on social and political issues, including over 80% of Gen Z workers, and 1 out of 4 workers have turned down a job because of a company’s stance on political or social issues.
When companies demonstrate their values publicly, they also are more likely to create brand loyalty. Consumers show that they care about the values of the companies they purchase from, especially as it comes to social issues and the environment. Two-thirds of consumers globally have indicated they’re willing to pay more for a product if the brand prioritizes sustainability, and nine out of ten consumers will say good things about a company on social media if that company makes a positive social or environmental impact.
Brand loyalty and customer retention are both enhanced by being a good corporate citizen.
The Cost of the Anti-“Woke” Movement
As the anti-"woke" movement continues to push back against the political and ideological aspects of ESG, these efforts are costing pension funds, retirees, and other investors billions of dollars each year. According to a report by Morningstar, sustainable funds attracted record inflows in 2020, while also outperforming their traditional peers. Not only are investors increasingly prioritizing ESG factors in their investment decisions, but laws being enacted in GOP-controlled states are creating very real losses for investors. In Indiana, the public employee pension fund estimated one proposal would cost $7 billion in losses over the coming decade, and in Kansas another proposal would cost $3.6 billion in losses. In Texas, the estimate is $6 billion.
That doesn’t include the losses due to reputational damage, which can have long-term financial impacts that are difficult to recover from. One example is the Volkswagen emissions scandal in 2015 that resulted in significant reputational damage and the company's stock dropping by over 30%. By contrast, companies that prioritize ESG issues can build strong brand reputations and consumer loyalty, leading to increased market share and revenue.
Fiduciary Duty and ESG
Corporate leaders, especially board members, have a fiduciary duty to make decisions that prioritize profits. Adopting ESG practices can align with this duty - and on the flip side, ignoring efforts to reduce risk created by material ESG impacts may be in violation of their fiduciary duties. By considering material ESG factors in financial decision-making, companies can demonstrate good corporate governance, prudent risk management, and smart investment practices.
According to a recent letter by a group of corporate leaders and investors,
"Our consideration of material environmental, social, and governance (ESG) factors is not political or ideological. Incorporating these issues into financial decision-making represents good corporate governance, prudent risk management, and smart investment practice consistent with fiduciary duty. We factor financially material considerations, including the impacts of climate change, into our standard investment and risk management decisions, in order to protect our operations and our investments.”
Are ESG Supporters Just Going Around Congress?
Another accusation frequently leveled against ESG supporters is that they are trying to use these initiatives as a way to get around regulations that Congress won’t enact. Those opposing ESG claim that companies should be free to operate within the bounds of the law without being forced by non-governmental forces to curtail or otherwise alter their business models. Oil companies and chemical manufacturers, they argue, are complying with all environmental regulations and should be able to operate within the bounds of the law without being penalized.
This accusation is a false flag. Investors taking into consideration ESG risk by companies are not replacing or undermining existing regulations; rather they are making cost-benefit decisions about which companies to invest in within the free market economy. To flip the argument on its head: supporters of ESG are acting within the bounds of the law by investing in companies that are acting responsibly for people, the planet, and profit.
Data also supports the notion that ESG is not about circumventing regulation, but rather about creating a more sustainable and resilient business model. Companies that prioritize ESG issues, including sustainability, tend to have better long-term performance, lower costs of capital, and are more resilient in the face of market volatility. They also tend to be more innovative because they look at the world in a fundamentally different way - one that seeks out a world where their business can continue to operate for decades and centuries to come.
Cost Savings of Sustainable Business Practices
While some opponents also claim that focusing on sustainability and social issues is costly and burdensome for businesses, it has been shown that sustainable business practices can actually save companies money in both the short-term and in the long run. As a very basic level, for example, companies can save money by investing in energy-efficient technologies, such as LED lighting or HVAC systems, leading to reductions in energy costs. Purchasing renewable energy can also be cheaper than traditional fossil fuels, especially as the cost of solar and wind power continues to decrease.
Conclusion
As investors and consumers become increasingly focused on sustainability and social justice, companies that ignore ESG factors will be at a competitive disadvantage. Being good corporate citizens of the world is not just about doing what's right; it's also about doing what's smart for your business. By prioritizing people and the planet at the same time as profit, companies can improve their financial performance, protect their investments, and demonstrate their commitment to the world around them. And that’s a secret we should be shouting from the rooftops.
The Uplift Agency
Uplift builds strategies, programs, and communication campaigns that advance ESG in workplaces, supply chains and communities.
We know how to navigate the road ahead because we’ve already been down it – 90 percent of our team has led environmental or social programs in corporations or nonprofits. Because ESG is all we do, our services are more comprehensive and integrated than most firms.
