Why Business Leaders Must Resist the Anti-ESG Movement – HBR.org Daily

U.S. business leaders are increasingly being exposed to the culture wars, with company decisions around issues like DEI, LGBTQ+ rights, abortion and even ESG investing being attacked by right-leaning politicians and pundits. Instead of retreating to the sidelines, this article argues that leaders can’t avoid these topics and that they have a business and moral obligation to address them head-on with courage.
The culture wars in the U.S. continue to rage, and they’ve come for business. Companies are being dragged into issues that stir emotions, such as abortion, gay and trans rights, racial and gender equity, and climate change. In particular, business is facing questions about its stance on societal issues mainly from the right side of the political aisle. So with 70% of America’s top execs calling themselves Republicans, business leaders now find themselves in an odd position: accused by high-profile members and pundits from their own party of being part of a “woke” or “ESG” progressive agenda.
For many companies, it may seem smart to stay out of anyone’s crosshairs. But try as they might, there’s no avoiding taking positions on the big issues of the day — major stakeholders, particularly young customers and employees, expect it.
Preparing for and figuring out a response to accusations of “woke-ness” is now a top leadership priority, so let’s unpack what’s going on. We’ll start with the most prominent examples facing organizations today. Then, I’ll outline what leaders should consider going forward in light of today’s political attacks.
First, some terminology and background on how a variety of issues have been lumped together by the right. “ESG” (environmental, social, governance) is primarily the language the financial world uses to represent attempts to measure the risk (and opportunity) to a company or investment stemming from environmental and social issues. The “G” part refers to how well a company manages the governance of these issues.
“Sustainability” is a much broader idea which looks at a company’s role in society and how it impacts, and is impacted by, the full gamut of environmental and social issues. The label “anti-ESG” makes it sound like going after investors (more on that in a bit) is the end goal. But it’s just part of a larger “anti-woke” and anti-sustainability effort, which was summed up nicely in an article by an executive at fund giant Morningstar: “Anti-ESG [is] a proxy for opposition to the spread of ‘liberal values’ in civil society.”
How is this broad opposition to environmental and social sustainability playing out for business? Here are a few examples:
The most prominent example of government coming after business over social issues is arguably the GOP governor and legislature of Florida versus the Walt Disney Company (the state’s biggest employer). Last year, the then-CEO of the happiest places on earth spoke out against Florida’s so-called “don’t say gay” bill that would, in Disney’s words “unfairly target gay, lesbian, non-binary and transgender kids and families.” The public statement only came after intense pressure and outrage from his employees.
Supporting LGBTQ+ rights is not remotely new to business, especially in hospitality, where the industry has long seen the benefit of marketing to, and hiring from, the gay community. But the normally anti-big-government legislators and governor behind the bill came down on Disney, taking away some longstanding economic advantages and the company’s ability to govern itself in central Florida.
The battle rages on. Disney has had some success in legal wrangling to weaken the government’s new influence over its operations, and CEO Bob Iger told shareholders this week that Florida’s retaliatory actions were not just “anti-business…but anti-Florida.”
In the wake of the Dobbs U.S. Supreme Court decision overturning the right to abortion, companies have faced new, tough choices. A number have offered to pay for transportation to other states for reproductive care for employees in states where abortion is outlawed. Companies with more direct connections to health care, particularly the big pharmacy and drug chains, have faced pressure about whether they will sell legal abortion pills.
In recent years, there’s been a dramatic increase in chief diversity officer roles, and company performance on diversity metrics became a much more common part of executive compensation. And in the aftermath of George Floyd’s murder in 2020, corporate America publicly committed at least $50 billion to confront systemic racism (with debatable success and follow-through).
Companies are generally proud of their DEI work, and have continued making commitments, like a new initiative from Ariel Investments, “Project Black,” which brings together Walmart, JPMorgan Chase, Lowe’s, and other major brands to build a more diverse supply chain.
But the anti-ESG crowd regularly attacks DEI, even in nonsensical ways. Immediately after the fall of Silicon Valley Bank, Florida’s governor and far right pundits blamed the collapse on “wokeness” and diversity. A shocking op-ed in the Wall Street Journal, commenting on the bank’s modest improvements in representation on the board, declared, “I’m not saying 12 white men would have avoided this mess, but the company may have been distracted by diversity demands.” These statements are not only baseless — there’s zero evidence of diversity playing any role at all in the collapse — they’re stupid and racist.
The idea of screening investments on environmental and social issues goes back decades. But in recent years, a critical mass of investors clearly decided that global mega-challenges like climate change create economic and business risk that they should understand and include in decision-making. They screened companies on ESG-related risk, created massive new funds and attracted hundreds of billions of capital — resulting in more than $100 trillion in ESG funds in 2022.
While the definitions underpinning ESG funds are hard to pin down, and the field is still nascent, ESG has held strong even with all the uncertainty of the pandemic and the tech stock rollercoaster. (ESG funds are, broadly, heavy invested in tech and light on oil and gas.) Even while $300 billion-plus was withdrawn from all funds in the U.S., ESG funds basically held flat. (Not losing funds in a broad market withdrawal is a win.)
The short story on why investors have moved forward in the face of any uncertainty and vagueness is that a) the environmental and social forces driving risk to business, like climate change, are real and here, and b) customers are demanding ESG and impact investing options.
But some government leaders aren’t having it. Couching their actions as part of an “anti-woke movement,” a few states pulled funds from high-profile ESG advocates such as the world’s largest asset owner, BlackRock. It’s part of this larger war on “liberal values” that Morningstar talked about, but it’s also the easiest lever to pull — removing funds from your pension investments is quicker than passing anti-LGBTQ laws.
Clearly, there’s a lot going on. Navigating a company’s role in society is one of the great management challenges of our time. Business leaders should pay close attention and take away three lessons.
Even as critics of ESG investing get louder, some investors in conservative regions are pushing back. Pension fund executives in Kentucky and North Dakota say they won’t pull money from ESG-friendly financial services firms. And in Indiana and Nebraska, banking associations are lobbying against GOP-written legislation that would force them to pull money from any financial institutions using ESG criteria.
The banks pushing back on anti-ESG laws are not seeking medals for philanthropy; they’re doing it because it’s good business. Environmental and social issues do have sizeable material impacts on companies, which means investors are legally required to consider them. The pension managers in Kentucky said that not investing with BlackRock would “violate [their] fiduciary duty.” The numbers are compelling to support this: A Wharton School of Business study estimated that a Texas anti-ESG law had cost the state $532 million in higher interest payments on municipal bonds. If states embrace these laws, and potentially cost taxpayers hundreds of millions of dollars, it won’t sit well with pensioners.
Investors also have to keep offering ESG products and services because their customers demand it. For example, a few years ago, I spoke at a conference a big bank held for their private wealth clients. I remember the meeting’s host, the bank’s global head of wealth management, telling his uber-wealthy clients, “We surveyed our global customers, and the number one thing you’ve asked for is impact investing and ESG.” That’s an amazing shift in recent years from a normal focus on maximizing returns, philanthropy, and family endowment planning.
It’s not just finance that needs to ignore anti-ESG pressure in favor of customer needs. Consumer products and food companies benefit from marketing to and creating products for diverse customers segments that want sustainable options. And going back to those pharmacy giants again — giving in to state legislatures on reproductive health care means giving up a large market for people wanting access to these products.
The bottom line is that politicians angling for more air time and a presidential nomination will not have the best interests of the economy or your business at heart. You have no responsibility to humor them if they are threatening your profits, business model, or customers.
Companies can’t sit on the sidelines anymore because, well, there are no sidelines. In a transparent world, your silence will speak volumes. Roughly 70 to 90% of respondents in the 2023 Edelman Trust Barometer said they “expect CEOs to take a public stand on issues” such as climate change, discrimination, and the wealth gap.
Of course, these are choppy waters to navigate. But for your stakeholders, your consistency becomes very valuable. You can’t say you stand for equity and then stay silent when the government moves to curtail the rights of many of your employees or customers. Likewise, you shouldn’t have aggressive carbon-reduction goals, but then lobby against any government action to reduce emissions (or let your trade association do it). You’ll need to develop more of a strategy around what some call corporate political responsibility.
So, there’s an important corollary lesson on politics: Business needs to reevaluate who its allies are. Your connection to a party and its philosophies is no longer just about tax rates or special industry incentives or laws. As the culture wars have heated up, it’s been good for politicians with populist leanings to attack business — from all sides. So, assess what will really help your company and sector move down a more just and net positive path, to meet your big carbon-reduction goals, and to protect your vulnerable employees and customers. Work with those in government who will, in good faith, help make that happen.
Don’t give in to political leaders who want to slow progress toward a fair and thriving world, or to bigots who want to systematically take away people’s fundamental rights. I know it’s scary. Many of your stakeholders — customers and employees alike — agree vehemently with the anger and attacks. But guess what? A most-likely larger group, especially younger customers and employees, wants you to stand up for marginalized groups and be consistent about your values – even if it’s uncomfortable. The new CEO of Mars, Poul Weihrauch, made the business and moral case clear in a recent interview with the Financial Times: “Companies that back off their social and environmental commitments in the face of ‘nonsense’ political attacks risk alienating a generation of talent.”
But even if you don’t know exactly which group is bigger, why not just do what’s right? And let me be clear: On many of these issues, there is a right and wrong. Companies should continue to fight to protect the rights of people to love who they want, to give women and people of color equal rights, and to ensure the ability of our shared climate to support our very existence.
To be clear, we can and should debate the how; for example, what’s the right policy mix or approach from business to tackle climate change? But morally, fiscally, and scientifically, it’s right to act. Full stop. In the past in this country, forward-thinking businesses have come out, well ahead of government, in favor of desegregation (for example, Coke and Pepsi competed to market to and hire Black Americans in the 1940s), for domestic partnership before legal gay marriage, and more. These were actions to access new markets and new groups of employees, sure, but were also clearly morally right.
When facing the forces of illogic and intolerance, stand up and show your employees and other stakeholders that it’s unacceptable for your business, for your values, and for society. Develop your courage muscle.
Like with all controversies — especially the fabricated ones — some organizations stand strong, while others run for the hills. In the battle over the abortion pill, pharmacy giant Walgreens has made its response clear as mud, appearing to say it would not sell the pill, then backpedaling (kind of). This is a legal product that the American College of Obstetricians and Gynecologists has deemed safe and effective. In the short run, Walgreens may win some points with GOP politicians and one pool of customers, and possibly avoid threatened lawsuits. But what does the action say to the 63% of women (And 58% of men) who say abortion should be legal (and could also sue for access)?
The anti-ESG investor battle is also creating dividing lines. As Bloomberg put it recently, Morgan Stanley is choosing to “double down on ESG” and launched more funds in February. At the same time, fund giant Vanguard pulled itself out of a global agreement to move its portfolios to net zero carbon by 2050. The Vanguard CEO recently told the Financial Times, “we cannot state that [ESG] investing is better performance wise than broad index-based investing.” That’s some weak tea. Especially since guaranteeing that ESG will outperform, especially in a short time frame, is an odd requirement — no investment thesis can guarantee it will outperform, and no other category of investments, like tech or health care, is really asked to. ESG investing is about risk management and satisfying customers, not guaranteeing results.
Some companies seem to be moving toward a muddled middle-ground of what’s been called “greenhushing,” or going ahead with your environmental and social efforts, but trying to stay quiet like a teenager sneaking in after curfew. A quarter of companies in a new survey said they would not publicize their climate goals, for example.
The old truism “pick your battles wisely” is always good advice, but some battles and some  rights are worth fighting for. If you take a stand publicly, you tell your stakeholders what you value. You can help move public opinion or bring out the supporters and quiet the critics. By staying silent, companies miss the opportunity to gather allies and build collective courage.
And wouldn’t you rather work for, or lead, a brave company?

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