ESG faces backlash

ESG Faces Backlash

May 22, 2024 | By Professor David Primo 

In this blog, Professor David Primo provides an overview of the backlash against ESG and the key questions that remain unanswered.

In 2014, I founded the Politics and Markets Project (PMP) at the University of Rochester to foster the civil exchange of ideas on contentious economic and political issues such as health care reform, immigration policy, fiscal policy, economic inequality, and environmental protection. The PMP hosts a panel discussion each semester with experts from across the political spectrum.

In March, the PMP hosted its latest panel discussion, “Investment or Illusion: Is ‘Woke’ Capitalism Here to Stay?”  

The use of scare quotes around woke in the title was intentional, as this word has become politicized. In fact, the entire debate over whether companies ought to pursue specific environmental, social, and governance goals (known as ESG) or take stands on social issues (known as brand activism) is now part of electoral politics, with erstwhile presidential candidates like Vivek Ramaswamy railing against “woke” corporations. 

Political rhetoric quickly translated into action, as was most vividly demonstrated when Florida Governor Ron DeSantis led the charge against Disney for taking a stand against the Parental Rights in Education Act (dubbed the “Don’t Say Gay Bill” by its opponents). Disney lost some of the perks Florida’s government had historically granted it, including the right to appoint members of a special tax board governing Disney World. Investment firms like BlackRock that had gone “all in” on ESG have suffered reputational and financial hits, as well, with some state and local governments pulling out of BlackRock investments.

What happened?

As I see it, advocates of brand activism and ESG, including those in academia—who in some cases built entire ESG majors in business school—overplayed their hand, and shrewd politicians pounced. Ironically, the very thing ESG and brand activism advocates are concerned about—the single-minded pursuit of shareholder value—led profit-motivated financial firms to create ESG funds that made a lot of money for fund managers but didn’t always perform as well for investors. Questionable metrics were used to claim that ESG delivered above market returns.

Those days are over. The SEC is cracking down on ESG funds, and investors are more wary of ESG claims, pulling $13 billion out of ESG funds in 2023.

The upshot is that firms are going to have to demonstrate the value of ESG much more convincingly. Markets—and society—will be all the better for it. If there are ways for firms to incorporate ESG principles into their market strategies in ways that improve firm performance, that is a win-win for society. But those ESG activities will now need to be justified with regard to a firm’s long-run performance. Similarly, firms are already thinking more carefully about when to weigh in on social issues and tying those stances to their core values.

Sparking conversation

Academic researchers are tackling these hot-button issues head on. The Aggregate Confusion Project at MIT, for instance, is slicing and dicing the many ESG metrics out there to see if we can find some “signal in the noise,” as one of their papers puts it. No longer can questionable scores be used to justify billions in ESG spending. 

At its most recent event, the Politics and Markets Project brought together leading scholars to discuss the challenges and opportunities that corporations must navigate when determining their role in society. I’m grateful to Ulrich Atz of NYU, David Bersoff of the Edelman Trust Institute, Sanjai Bhagat of Colorado Leeds (and a Simon MBA alum!), and Kimberly Whitler of UVA Darden for their willingness to discuss ESG in a civil and respectful fashion at this event.

We need many more discussions on ESG and brand activism, as these topics are relevant not only for finance but for our democracy as a whole. Does democracy suffer if firms insert themselves into issues like abortion, racial justice, voting rights, and any number of policies unrelated to their core business, or does it help foster an involved citizenry? Does it coarsen society to worry that picking up a Bud Light or buying a Chick-fil-A sandwich will somehow brand you ideologically?

Right now, we have more questions than answers, which makes it an exciting time to conduct research in this area.

David Primo is the Ani and Mark Gabrellian Professor and a professor of political science and business administration at the University of Rochester. He directs the Politics and Markets Project, which he founded in 2014.

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