The following commentary/analysis is one I wrote in my capacity as a senior fellow at “the nation’s oldest consumer protection agency,” Consumers Research, where, among other things, I compile a weekly letter for public pension-fund managers.  I am sharing it here today because I thought it might be useful to some of you.


On the Practice of Reducing Transparency

The Wall Street Journal has discovered, somewhat belatedly, that ESG is now a controversial issue, that corporate leaders, bankers, investors, and many other formerly unabashed supporters of the business/investment phenomenon now find the term problematic.  In a long piece published just the other day, the Journal concluded that ESG is “the latest dirty word in corporate America.”  To wit:

Many companies no longer utter these three letters: E-S-G.

Following years of simmering investor backlash, political pressure and legal threats over environmental, social and governance efforts, a number of business leaders are now making a conscious effort to avoid the once widely used acronym for such initiatives.

One might think that this constitutes a significant victory for ESG’s opponents.  They’ve finally gotten through to the big shots in the C-Suites.  They’ve finally convinced them to give up the vague and malleable goal of “corporate purpose” and to focus instead on building better widgets.  But have they?

On earnings calls, many chief executives now employ new approaches. Some companies, including Coca-Cola, are rebranding corporate reports and committees, stripping ESG from titles. Advisers are coaching executives on alternative ways to describe their efforts, proposing new terms like “responsible business.”…

Many CEOs stress that they continue to follow sustainability commitments made years ago—even if they are no longer talking about them as often publicly. A December survey by the advisory firm Teneo found that about 8% of CEOs are ramping down their ESG programs; the rest are staying the course but often making changes to how they handle them.

If you read the whole thing – and I’m obliged, I suppose, to tell you to read the whole thing – what you’ll learn is more of the same: businesses, corporate leaders, investors, etc. have all stopped talking about ESG, even though they continue to engage in ESG-related behaviors.  The “change” here is in terminology rather than practice.  ESG’s opponents haven’t won a thing.

Nevertheless, the Journal notes that “The fiercest critics of ESG say they welcome less discussion of it.”  That’s interesting, mostly because they shouldn’t, at least under these circumstances.  This whole story – which has been going on for more than a year now – demonstrates that corporate leaders still don’t understand what ESG is and still don’t understand why it’s a concern.  Moreover, neither they nor the “fiercest critics” who welcome all of this seem to understand what makes capital markets function properly or how to preserve their integrity.

Let’s start with something basic.  Those who oppose ESG do so not because they hate the environment or because they are opposed to saving energy or whatever.  They oppose ESG because it politicizes business and markets and, as a result, prioritizes social and political matters over the rights of shareholders.  ESG takes more than two millennia of theory and practice and flips them on their heads in an effort to achieve ends that are extraneous to the function of capital investment.

The Journal quotes Revathi Advaithi, the CEO of Flex, who told the paper that “there isn’t a question of whether they need to operate in a sustainable way.”  According Advaithi, “It’s not as though I got a whole bunch of new investors because we had a sustainability report or we were ESG-focused…We didn’t do it for that purpose….We wanted to focus on water reduction, power reduction, all those things.”

Well, guess what?  That’s great!  Advaithi and her company should be commended for doing so, IF – and that’s a BIG “if” – those reductions were intended to improve the performance of the company.  If the reductions cut costs and increased profitability or if they improved the company’s reputation and bumped up sales or if they served some other, provable pecuniary purpose, then Advaithi should be congratulated and heartily thanked.

If, by contrast, the reductions were made because Advaithi thought it was “the right thing to do” and it actually cost the company money, then she should be fired.  That’s not her job.  And “the right thing to do” is generally not up for discussion.  In her position, the right thing to do is whatever is in the best interests of her shareholders (within bounds, of course, as even Milton Friedman conceded).

The opposition to ESG is fundamentally the opposition to the dilution of shareholder rights for political purposes.  It is NOT political in and of itself.  It may appear political – and in some cases, may have become political – but that’s more a quirk in the system than anything else.  Whenever the opposition to ESG is discussed, blame for its “politicization” is inevitably placed on the shoulders of “state officials” who have made it an issue.  What these discussions rarely note, however, is that these state officials have their own fiduciary responsibilities, some derived from the businesses and revenues of their states and their citizens, and others derived from their responsibilities to the shareholders vested in public pension systems.  Again, these officials oppose ESG not because they hate the environment but because they oppose the weakening of their constituents’ economic rights through the pursuit of extraneous business goals.  The fact that public pensions are under the general purview of government officials doesn’t change the fact that their interests are primarily fiduciary, rather than political.

In the end, it all comes down to the preservation of the capital markets system and the ability of investors to be certain that they are getting the returns to which they are entitled – which, not coincidentally, is the reason why this trend of hiding or “rebranding” ESG efforts is actually quite dangerous.

Capitalism and capital markets, by extension, are enabled by transparency.  There is a reason, after all, that publicly traded companies are required by law to disclose all material matters whenever necessary.  This is a capitalist truism: in order for investors to make informed decisions, they have to be informed.  Without transparency, markets would simply cease to function properly, and the entire system would, in time, come crashing down.

Given this, when Brad Karp, who is the chairman of the law firm Paul Weiss and who advises CEOs on ESG and other matters, says that “Most companies are moving forward operationally with their ESG programs, but not publicly touting them, or describing them in different ways,” he is describing a questionable practice at best.  He is talking about the purposeful reduction in transparency, an effort to comply with the letter of the law while intentionally violating the spirit of it.

Likewise, when Texas Attorney General Ken Paxton purportedly “welcome[s] less discussion” of ESG, he is enabling this reduction in transparency, signaling to companies and large asset management firms that they are on solid ground when they choose to disguise their extraneous, non-pecuniary social endeavors.  Needless to say, this is an enormous mistake.

Ironically, possibly the best solution to the problems with ESG in general and this trend of corporate “green-hiding” in particular is also the simplest: disclose everything and then prove it.  If you want investors, regulators, politicians, and others to believe that your efforts to cut water or fossil fuel usage are important, then show your work.  Don’t hide behind weasel words like “responsibility” and “sustainable practices.”  Own up to what you’re doing and why.  Then show how it benefits your shareholders.  And if you can’t do that, maybe you ought to rethink things, rather than hide them.

Stephen Soukup
Stephen Soukup
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Steve Soukup is the Vice President and Publisher of The Political Forum, an “independent research provider” that delivers research and consulting services to the institutional investment community, with an emphasis on economic, social, political, and geopolitical events that are likely to have an impact on the financial markets in the United States and abroad.