What’s the Story?

ESG was mentioned directly by 74 S&P 500 companies in Q1 earnings calls last year. That is below half the 159 mentions seen since the Q2 2022 peak, with falls in each quarter since then, according to a report by FactSet the financial information company.

Now, with Q1 2024 earnings calls in full swing, and hundreds of calls complete, ESG has been mentioned only nine times, and the figure might fall again as Q2 2024 calls unfold in the coming weeks says FactSet recently.

This trend follows the CEO of global investor Blackrock, Larry Fink, who announced that he will not now use the term ESG because it has become “weaponised and misused by the far left and the far right.”

Indeed, in the USA, the House Republicans are aiming to make July 2024 into “ESG month” on Capitol Hill as they seek to reverse the trend towards “do good” investing. In a presidential election year, this GOP initiative could not be more high-profile. 

However new terms like “green economy“ and “energy transition“ are now seen commonly in the S&P 500 earnings calls, as the business importance of climate and the move to Net Zero continues apace on both the corporate and investor agendas.

Why Does it Matter?

The Larry Fink position is particularly noteworthy as he has been the corporate face of promoting responsible and sustainable business.

Over the last decade Fink has urged investors and companies to take a long-term view and manage the impact of responsible corporate practices when framing and evaluating future prospects. His comments earned him critics from both sides of the ideological spectrum. Some said he was proposing woke capitalism, but the left said he was not going far enough.

ESG as a term came from a United Nations 2004 report entitled “Who Cares Wins”.

Sustainable practices are just good business. Treating customers fairly, employee engagement and delivering fair value to shareholders are vital self interested activities’ not woke do-good actions.

The 1980s saw the shareholder value maximisation movement which was based on monetary economics, promoted by Milton Friedman among others. The doctrine of shareholder primacy says the role of the company is only to deliver profit to shareholders, government or charities are responsible for everything else.

The woke capitalism mis-characterisation of ESG is wrong. Quality companies have always managed their goodwill profile and the company reputation. The CORPGRO article “ Dark Matter” explained this some time ago.

Companies which under manage important business factors will rightly be criticised. Similarly, uncontrolled expenditure without considering a balanced return on investment is unwise. 

The difficult issue is judging the optimal spend. And for that tools are thin on the ground. That said, one tool is the ESG "Look Through" value when ESG metrics are seen alongside finance metrics in executive incentives. To date though, the use of this tool remains rare.

Indeed, in judging the right spend, some investors have criticised some executives for excess investment in ESG at the expense of profit. Paul Polman former CEO of Unilever and author of Net Positive is one and another is Emmanuel Faber, former CEO and Co-Chair of Danone; who is now Chair of the ISSB.

Newspoint view

‘Newspeak” in George Orwell’s 1984 is a strong form of political control. What can not be said, can not be debated. Soon the fabric of freedom of speech is undermined. It is ironic that the woke camp seem to be the most keen on cancelling opposing viewpoints. But it is ironic too that the right in the USA is making debate difficult on ESG.

Good companies will see through the term ESG and continue to manage correctly those underlying business issues that are important to the corporate agenda. That is firmly in the interest of shareholders.

Reassessing the ESG factors for the company; their role in executive incentives and the potential cost and return on investment expectation are all needed.

In this political environment, clear company disclosure, and rationale of corporate action is essential. Investors have been clear on ESG in executive incentives, the metrics chosen must have clear business value, and the targets set must be of similar stretch to the conventional finance ones.

Retreating from important company ESG items, particularly Climate and DE&I would be, put simply, a mistake. But given the ongoing political debate, it is important to revisit ESG metrics and targets in executive incentive plans to ensure that they meet the business need and can bear close and often hostile scrutiny.

Executive Compensation and Incentive Design

Reward and Share Plans 

Remuneration Advisory and Support

ESG and Sustainability

Please feel free to email or call:

Damian Carnell - [email protected] +44 (0) 7989 337118

VA Bec Bostock - [email protected]

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