Opinion | The sustainability agenda has had its day, or has it not?
A tour through the USA suggests that the sustainability agenda has had its day. It also became clear in Davos that the sustainability agenda is under pressure, media writes. However, the arguments of the skeptics are imperfect, and we in Europe would be wise to persist in our sustainability agenda, says professor Jan Bouwens.
The sustainability agenda has come under heavy pressure in the USA in recent months. For example, ExxonMobil wants to have the courts prohibit shareholders from voting on environmental goals for the company. ExxonMobil’s argument against the proposals is that the “extreme agenda is aimed at destroying the company’s business interests.”
During so-called “earnings calls” where company management explains quarterly results, ESG was referred to in 150 cases for S+P 500 companies in the third quarter of 2022. By 2023, that number had been more than halved. Investors also seem to have less interest in sustainability. The investment platform Morningstar Direct has reported negative growth in investments in ESG funds since mid-2022.
In several states, politicians are combating the sustainability agenda with legislation by prohibiting pension funds from including sustainability goals in their investment strategy, arguing that sustainability goals are at odds with value maximization for the benefit of the pensioner. Florida’s state treasurer recently divested $2 billion in assets managed by Blackrock, an institutional investor accused of incorporating ESG goals into investment decisions. “ExxonMobil takes legal hammer to climate shareholder groups” the FT wrote. It’s also published a comment on EU’s climate conundrum that warns the EU that “European companies find themselves increasingly burdened by overregulation, which is weakening the economy and advancing deindustrialisation.”
This concern seems to be at odds with the forces that motivate firms to invest in the transition from fossil to renewable energy. These motives are risk and return. In the Netherlands we observe that parties that recently won the election have little faith in pursuing a “green” of ESG agenda. ESG expert Daniella Strik from law firm Linklaters does not rule out that the rise of these parties in national politics and lower government levels will have an impact on social sentiment about climate and ESG.
Prominent members of the anti-ESG movement worldwide argue that pension funds risk breaching their fiduciary duties to pensioners if they allow their investment decisions to be motivated by ESG goals because “their obligation is to maximize pensioners’ financial returns.” , and not to pursue social or political objectives.”
That last quote makes it clear where the sting lies, ESG and sustainability goals are regarded as political goals. We also see the same point in a recent publication by the academic David McLean, author of the recently published book: “The Case for Shareholder Capitalism: How the Pursuit of Profit Benefits all“. Here he makes a distinction between activist and politically activist shareholders, in which the former influence the organization to create value and the latter influence the organization to destroy value. The reason he gives is that ESG performance has no demonstrable relationship with financial returns, while the ESG standards are completely arbitrary, with the result that managing ESG easily amounts to achieving political goals at the expense of financiers.
McLean fears that this will miss important investment opportunities. He argues that if nature is poorly served, legislation will force the company to do the best, and that employees will turn their backs on the company if they are bad employers, while customers will walk away if a company adopts an antisocial attitude towards society and customers. Based on this reasoning, he argues that ESG regulations are unnecessary or even harmful to a country’s economic activity.
Business case of going green
With all these arguments in hand, you start to suspect that we are embarking on a massive scale of value destruction in the EU. However, if we let the arguments sink in, it soon becomes clear that we must focus on explaining how sustainability choices contribute to value creation. Risk and return play a leading role here.
Given the increasing social pressure to go “green”, it is likely that legislation will force companies to combat emissions in the near future, making costs that will then have to be incurred prohibitively high. This risk includes factors such as carbon taxes and pollution cleanup costs. The life of the company is then threatened, not the life of the planet!
Return plays a role if contracting parties have a preference for concluding contracts with “sustainable” companies. These could be consumers, employees and financiers. The point here is who knows how to attract the best people and financiers. That is also a matter of who has the best chance of survival.
There is extensive support in the literature for the importance of both the risk and return theses. Those who can adapt best have the highest chance of survival. Some directors may find it difficult to convince shareholders. The ban that ExxonMobil wants to impose on shareholders to think about transition suggests that not all directors are prepared to think about a fossil-free future. In business terms these firms create a competitive advantage if they do just that. The yield this advantage entails is all that it takes to convince the investors who now still invest in brown energy to turn green. That is mainly a matter of time. The good part of it is that if the EU presses on it will then lie ahead of the USA.
Jan Bouwens is professor of Accounting at the UvA and Research Fellow of the University of Cambridge, Judge Business School.
