22 Jul PUBLIC PENSION CORNER, #5
NEWS:
I. ESG Ratings Provider Says Companies Keeping ESG Investments but Not Talking About Them
ESG ratings provider EcoVadis has released the results of its 2025 U.S. Business Sustainability Landscape Outlook and reports that most American companies are maintaining or increasing their investments in ESG, but are keeping quiet about them. They are, as EcoVadis happily reports, “greenhushing” rather than reforming their practices to align with shareholder preferences:
EcoVadis said the “greenhushing” occurring alongside increased investments shows many companies “see it as a behind-the-scenes lever for long-term growth.” More than 6-in-10 respondents (65%) reported viewing supply chain sustainability as a “competitive advantage,” according to the survey.
The firm surveyed executives at U.S. companies with over $1 billion in revenue who are responsible for decision-making across their company’s procurement, sustainability, supply chain, finance, risk and compliance and IT departments, according to the report and an accompanying press release.
Among executives at the director and VP level, 62% of respondents said they believe “supply chain sustainability helps attract and retain customers.” That view was shared by 59% of C-suite executives who responded.
II. Meanwhile, the Conference Board Finds Complementary but Somewhat Different Results
The Conference Board has released the results of its recent survey of ESG executives exclusively. Its results don’t necessarily agree with EcoVadis’s, they don’t necessarily contradict them either:
The report surveyed 125 corporate sustainability and ESG executives at large U.S. and multinational companies; 80% of surveyed companies were U.S.-based and 46% reported annual revenues of more than $10 billion.
A broad majority of surveyed executives have already experienced backlash on their ESG efforts, with 65% of respondents reporting their firms had experienced “noticeable” backlash toward ESG efforts, primarily from advocacy groups and federal policymakers. The backlash is expected to persist or intensify over the next two years, 90% of respondents said, with climate goals and transition plans expected to be the most controversial topics.
Only 8% of respondents said their company had decided to double down on ESG commitments in response to policy shifts.
COMMENTARY
By Stephen R. Soukup, President and Publisher, The Political Forum
“The Academization of ESG Continues”
Almost exactly a year ago, I noted that the nature of the ESG debate is changing and that this change will likely cause even more heartburn for the investment strategy’s supporters. Specifically, I suggested that the debate over ESG is undergoing “academization,” meaning that, “[g]oing forward, it is highly unlikely that any discussion of ESG performance will be considered valid unless and until it is confirmed or, at least, buttressed by academic research.”
This, I suggested, would be both good and bad for those who seek the truth, largely because academics are both good and bad. Some are earnest, honest, and driven by a search for knowledge, while others are ideological hacks who use research only to confirm their preexisting biases. In the end, however, the presence of the former would alter perceptions of ESG profoundly, making it far more difficult for its supporters to continue to undermine shareholder rights and fiduciary duties in the name of political endeavors.
Over the last twelve months, this expectation has proven more than justified, as the academization of ESG has indeed exposed the weaknesses in the strategy, the flaws in the arguments used in its defense, and the dishonesty of many of those who have pushed it and related notions on investors and investment fiduciaries. Alex Edmans, a professor of Finance at the London Business School, and the team of Professors Allen Mendenhall (now at the Heritage Foundation) and Daniel Sutter (Troy University) have been among the leading academic experts whose work has undercut the fundamentals of ESG.
But they’ve hardly been the only ones.
Just in the past couple of weeks, two new academic studies have also challenged ESG’s foundational premises, including the all-purpose excuse given for the use of ESG, even when its supposed benefits prove illusory.
The first of these was conducted by researchers from Texas Christian University, Ohio State University, and Lancaster University, who were able to examine real-world data pitting shareholder-centric corporate governance against the stakeholder version, documenting the effects on companies of the shift from the former to he latter. Jason Willick, a columnist for The Washington Post (of all publications), recently summarized the study as follows:
The study — by René M. Stulz of Ohio State University’s Fisher School of Business and economists Benjamin Bennett and Zexi Wang — takes advantage of a natural experiment. Most publicly traded companies in the United States are incorporated in Delaware, which requires corporate executives to make decisions to benefit the company’s shareholder owners. In 2017, Nevada, another popular state for incorporation, changed its law to weaken that requirement. The law there permits executives to consider “without limitation” the interests “of society” when they make decisions, and shields them from shareholder lawsuits.
The researchers did a battery of statistical tests on public companies in both jurisdictions from 2015 to 2019 — the two years before and after Nevada’s legal change. They found evidence that Nevada’s law led to “a significant reduction in firm value” and higher borrowing costs for companies incorporated there. Just as important, it prompted a decline in corporate governance: External auditors and the Securities and Exchange Commission became more likely to flag Nevada companies’ books. The companies’ boards of directors were more likely to include relatives of management, signaling a loss of independence.
And far from unleashing egalitarianism and social nirvana, the relaxation of shareholder oversight in Nevada appears to have prompted CEO pay to increase and become less tied to business performance. Environmental, social and governance (ESG) scores — which try to measure responsible business practices — fell by 15 percent.
That’s, well, brutal. Unfortunately for ESG fans, it only gets worse.
Over the last several years, ever since the pushback against ESG began in earnest, the default defense of the investment strategy has always been the same: this isn’t about politics; it’s about risk management; it’s simply about gathering as much potentially material information as possible in order to make better, more knowledgeable decisions. ESG, its defenders have always claimed, is nothing more than a tool, used to determine what is or is not a good, long-term investment.
In truth, of course, this has always been little more than an excuse, the post-hoc justification for the imposition of overtly political calculations on investment decisions and the conflation of epistemological closure with materiality. Nevertheless, it is the universal rationalization. “We’re not violating our fiduciary duty by using ESG,” they claim. “You’re violating your by not doing so.”
Enter Scientific Beta, which has been producing academic research on ESG claims for years and, not coincidentally, driving ESG supporters batty for the same amount of time. The French company – which started life as a project of EDHEC Business School – recently released a report on the use of ESG metrics in risk analysis, precisely what ESG’s supporters have claimed is its primary purpose. The results were not, however, what those supporters would have liked. The Wall Street Journal’s James Mackintosh explains the results this way:
[Scientific Beta] constructed a portfolio to make optimal use of 15 years of ESG information, balancing risk and reward while maintaining diversification using standard tools….
“There’s just not evidence of an incremental return contribution from these ESG metrics,” [Scientific Beta’s Felix] Goltz said. “If you have traditional financial objectives, you don’t really need these ESG metrics.”
What about the idea that more information is always better? Well, it turns out a lot of information doubles up with standard financial metrics—perhaps because more profitable companies have the capacity to spend time and money improving their ESG ratings, rather than because better corporate ESG improves profitability. If extra information adds nothing new, it is simply a costly distraction. Even for the many ESG issues that do seem to provide valuable information in backtests, better performance mostly disappeared when used for forward-looking investment.
To put it more bluntly: ESG analysis does not improve portfolio returns. It is almost entirely extraneous, meaning that ESG metrics are not material. ESG analysis is a waste of time and resources (and in the case of emissions reporting, a waste of significant time and resources). In turn, this means that ESG is also a violation of fiduciary duties for both corporate managers who implement it and asset managers who demand it.
Between these two studies, it’s been a rough couple of weeks for supporters of ESG. Unfortunately for them, with the academization of the field, this is only the beginning.
