On November 3, 2022, 51 law firms received letters about their ESG practice, and potential regulatory risks and enforcement stemming from ESG practices. This occurrence opened speculations across the country on whether ESG will feature more prominently in congressional hearings, and if this is the case, how can values aligned investors protect the objectives of the framework.
The anti-ESG movement is a well-organized attack and currently, pending anti-ESG state legislations are increasing, most of which are focused on state divestment from financial institutions or companies with investment philosophies that factor ESG considerations or are identified as “boycotting” climate, energy, and firearm industries. On the flip side, stakeholder action by individuals and NGOs among others holding corporations accountable for their contribution to climate related externalities are increasing globally. For example, we are experiencing the first of a series of lawsuits where an individual sued a carbon major for damages and got standing; in addition, citizen action is fast rising and NGOs are using litigation as a tool to enforce climate action. Providing funds for NGOs is one of the ways value-aligned investors may get involved to support ESG value underpinnings. Foundations and philanthropists may move the needle by funding initiatives such as carbon accounting, providing first loss capital for emerging market investments, and investing in clean energy transition in coal mines among others.
The anti-ESG movement also flag ESG-related antitrust risks. Philanthropists and foundations acting collectively to promote responsible business practices must pay attention to ESG metrics that may affect price and supply, thereby leading to collusion. NGOs and philanthropists may navigate antitrust risks by working with nonprofits such as Business for Social Responsibility (BSR) who already set impact rules of the road for companies and do not require aggregation by other nonprofits to drive impact.
Seeing how events have cascaded with real risk, liability, and enforcement actions, it is no surprise that the anti-ESG movement is ramping up. To clarify how ESG risks present to businesses, different jurisdictions are using the single materiality or the double materiality lens to address risks. The single materiality lens focuses on material ESG metrics’ impact on enterprise value, which has been the approach in the United States. This is unlike the EU which uses the double materiality lens to address ESG risks from both enterprise value and information material to stakeholders. If companies focus on the single materiality lens, they may likely not get caught in the anti-ESG crosshairs.
Finally, the ESG increased interest and backlash call for the question of divestment or engagement. At MoFo, our philosophy is more structured around engagement, as we understand that, with climate for example, the fossil fuel industry has a role to play in energy transition. For example, an oil major may convert to a Delaware public benefit corporation to impose increased responsibility for mitigating negative externalities from its operations because of its fiduciary duty to its shareholders and to the public on promoting its stated benefit. Capital market tools also need to run with government and philanthropic tools to drive change.
While not oblivious of the fear and entrenched interests that makes it difficult to make real change under the ESG framework, the current ESG framework is the much-needed tool to drive sustainable development within the United States. Improving language around ESG framing to show real risk instead of feel-good antics, as well as deeply challenging one another to better understand our differences to avoid polarizing the country, are important to keep the values that underpin the ESG framework together.
- Susan Mac Cormac, Partner, Morrison & Foerster
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