ESG is dragged into cultural wars! Is he going to get out of this?

“In 2022, the woke left […] has set in motion a strategy to enforce their radical environmental and social agenda on publicly traded corporations.” (…) The shift is entirely manufactured by a handful of very large and powerful Wall Street financiers promoting left-wing environmental, social, and governance goals (ESG), and ignoring the interests of businesses and their employees.”

“ESG is a pernicious strategy because it allows the left to accomplish what it could never hope to achieve at the ballot box or through competition in the free market. ESG empowers an unelected cabal of bureaucrats, regulators, and activist investors to rate companies based on their adherence to left-wing values. Like the social credit scores issued by the Chinese Communist Party, a low ESG score can be devastating, making it virtually impossible for a company to raise capital—and that is exactly the point.”

The above excerpts were extracted from an op-ed by former US Vice President Mike Pence, published in May 2022 in “The Wall Street Journal.” Such strong criticism of ESG, coming from the right and expressed by an established politician, drew the attention of economic observers in mid-2022. The op-ed signed by Pence is even considered the foundation for launching his name as a candidate for US president.

The harshness of the former vice president’s criticism sounds two tones above the goal. ESG dates back to 2004 when it was created in response to a provocation by then-UN President Kofi Annan. A synonym or close to “Sustainability” and “Corporate Responsibility,” ESG has been the term most used in recent years. But until recently, it did not use to provoke such passionate controversies.

In the article, “The Deranged Demands of the ‘Anti-ESG’ Movement,” published in “The New Republic” in late August, journalist Kate Aronoff shows that Pence’s criticism has already been incorporated into the Republican Party, or at least into a vital wing of it, the most extreme right-wing. In Governor Greg Abbott’s Texas, the treasurer announced a list of ten financial institutions and 300 funds that, according to his assessment, promote a “boycott of energy companies” (fossils, Aronoff adds) and will therefore be forced to divest from state projects and official companies, according to a new anti-ESG state law, Senate Bill 13. It forces financing companies to say they will not boycott energy companies, whatever the source – oil, coal, or gas.

Since the Texan bill began to be discussed, other anti-ESG proposals have been presented in 15 US states and have won in four. The GOP argument, the journalist explains, is that any decrease in investment in oil, coal, or gas is a form of discrimination.

Florida Governor Ron DeSantis – another politician who has been viewed as president’s runner of the Republican Party – recorded a video with anti-ESG messages similar to Pence’s, but with a more gloomy soundtrack. According to Aronoff, in the US political-economic dynamics, “the battle over ESG is on some level one between different arms of capital with different political leanings; the fossil fuel companies helping back anti-ESG efforts inordinately lean right and have an obvious interest in wanting to keep as much investor cash as possible parked in their industry. Banks and asset managers tend to vote blue and take a longer-term view of fiduciary responsibility, looking to insulate returns on their broad portfolios from the considerable financial risks posed by climate change.”

According to Aronoff, the goal of bills such as Bill 13 in Texas, and copies of it in other states, is to prevent gigantic investment funds like BlackRock from using its significant assets to secure a green and woke political agenda. She writes that Texas officials accuse BlackRock of “boycotting energy companies” although the fund has invested US$108 billion in Texan energy companies. In other words, there seems to be a performative aspect in the initiatives of Texan politicians.

ELON MUSK ENTERS THE ARENA

In May 2022, around the same time as Pence’s manifesto, businessman Elon Musk added fuel to the fire when his electric automobile company was excluded from the S&P ESG leader index. In response, Musk tweeted to his 108 million followers that S&P had “lost its integrity” and made ESG a scam capable of being “used as a weapon by any fake social justice warrior.”

Musk’s criticism – like almost everything he does – resonated. Musk was angry at Tesla’s exclusion from S&P’s list of leading ESG companies, while Exxon, the world’s largest oil company and a significant greenhouse gas issuer, was listed. Tesla was withdrawn from the S&P list for governance and factory culture issues, according to “The Economist.” “Elon Musk was not the only one to consider such an absurd decision,” the magazine writes.

According to climate reporter Tim McDonnell on Quartz, “Musk is right, ESG needs to be better defined – but not because the acronym ‘only measures whether your business follows a woke agenda,’ to use the words of celebrity businessman.” “Good luck,” the reporter writes ironically, “in the search for a woke fan of Exxon.” This is not the problem of ESG, McDonnell concludes.

IS ESG IN CRISIS?

Brazilian Fabio Alperowitch has been dedicated to socially and environmentally responsible investments for 30 years, even before the acronym ESG existed. Although small, the practice of responsible investment is old, says the entrepreneur. Alperowitch, a professor at the Aberje School of Communication, even reminds us of the existence in the 19th of funds that were concerned with avoiding investments in the slave trade. “It’s tiny, but it existed,” he says.

ESG seems new in the Brazilian financial market because it was seen as ideological and banned for a long time. The acronym is from 2004, he recalls, but the practices are earlier.

In 1993, as a student at FGV, Alperowitch collected US$10,000 with employees of the global company, where he was an intern and founded FAMA Investimentos with a partner. Today, FAMA accounts for the management of some billion reais, 80% of which originated outside Brazil, and Alperowitch became one of the leading defenders of the role of ESG in Brazil.

When, in June 2022, after the demonstrations by Pence and Musk, among others, the British magazine “The Economist” published a special report with various criticisms of ESG, Alperowitch read the material carefully, just like almost everyone interested in business sustainability. Although he recognizes “pertinent points” in the journal’s approach, it did not seem so relevant to the ESG situation in Brazil.

“I think there is a home bias in that view; it is as if all the problems were environmental and climate change because the [other] problems of rich countries are not so highlighted and, therefore, talking about climate change, becomes the main problem. They do not live in a racist country like ours; they do not live in an unequal country like ours; they do not live in the second country that kills the most in workplace accidents, which is homophobic and transphobic, with endemic corruption. Their vision seems very globalized, without the same empathy for countries with other kinds of problems.”

Carlo Linkevieius Pereira, CEO of the Global Compact Brazil Network, a UN action focused on companies and private organizations, came to conclusions similar to those of Alperowitch’s FAMA. He summarizes the ESG approach of the English magazine in one sentence: “Forget S and G and focus on E.”

“It is true that the great evils the world will live in are due to climate change. But we can’t focus exclusively on it,” Pereira says. “We have a big problem, huge, which is climate change, but we are already quite bad in many things. So you can not only mitigate or even adapt to problems generated by climate change, but we face serious poverty and inequality problems. But we could talk about the problem of basic sanitation, education, and various issues. Climate change will aggravate all bad things we already have, but that doesn’t mean I shouldn’t attack the basic problems.”

Pereira says it is essential to distinguish between ESG, which is defined as the financial world’s criteria to assess sustainability risks, on the one hand, and the practice of sustainability within companies, on the other. According to the executive, it always makes sense to refine and question financial criteria. Still, companies can’t cool down in the face of the many challenges of today’s world. The new generations do not let it go, says Pereira. “Picture yourself saying to Greta Thunberg or Amanda Costa that we will step back,” says Pereira, citing two young activists, one Swedish and the other Brazilian.

HOW TO MEASURE ESG?

One of the main criticisms of ESG presented by “The Economist” is the alleged difficulty in measuring social advances by companies. Under the title, “It’s the environment, stupid,” the magazine argues that “ESG is often neither a good measuring tool nor a good risk management tool.” Part of the problem is that the information it generates “has little relevance to a company’s main activities. Confusion has been created for companies.” And the article goes, “it makes it difficult for investors to calculate what it means for the quotes and the value of investments.”

Denise Hills, Global Director of Sustainability at Brazilian giant Natura &Co, challenges ESG’s vision as confusing and contradictory. It is precisely in sustainability that Natura seeks inspiration and clarity of purpose. Hills shows contagious enthusiasm for the ESG culture at the cosmetics and wellness company, founded in Brazil five decades ago and today present in more than 100 countries. Gender equality and diversity goals have been established, measured, and already met. Each time the company enters a country, it carries out a census inside and outside it to set goals – diversity, race, and people with disabilities (physical or mental) – that may vary according to local culture. There are also commitments to ensure a living wage for all employees. The establishment of value also varies from country to country. It involves a complex calculation that considers the quality of public services to the local cost of living. For this, it has tools for assessing value chains developed by business organizations such as the “Sistema B” and the “UN Global Compact,” among others.

So many measurements, criteria, and goals do not seem to bother Natura, which acquired the competitor Avon and is incorporating it within the Natura &Co group through the same sustainable culture of the Brazilian company, known worldwide for its ESG practices. While “The Economist” magazine contrasts with ESG the “clarity” of financial accounting, “which seeks to exclude moral and political judgments,” Natura finds in the social and environmental diversity of each place where it operates much of the inspiration for its performance. According to Hills, Natura’s goal became “transforming socio-environmental challenges into business opportunities.”

Another Brazilian giant, Banco Itaú, also finds inspiration in the diversity of its employees. Maria Julia Azambuja, Superintendent of Diversity and Attraction and Selection of the company, says: “Diversity is a topic that we have looked carefully for years here at Itaú. In 2017, we took a step further and adopted the guidelines set out in the Charter of Commitment to Diversity that we share with the market. Since then, we have made a public commitment to employees, customers, suppliers, partners, and society. Last year, we set diversity objectives on the gender and race fronts, according to equity and inclusion challenges, respectively. Our chart already has a high percentage of women up to medium management positions.”

Asked if it is challenging to attract and measure diversity within the company, Azambuja says: “The greatest challenge, perhaps, is to break stereotypes, such as that a financial institution is predominantly occupied by male professionals, and recruit diverse professionals who are willing to be part of the transformation movement of Itaú. Our efforts in the HR area are aimed at breaking this paradigm and bringing diverse professionals to the company, of all genders, races, and social contexts who are willing to be part of this change.”

DOES ESG LIVE A BOOM?

A pioneer in corporate sustainability, consultant, speaker, and teacher Sonia Consiglio does not see the ESG crisis but rather the opposite, a “boom,” which she defines as a moment of excellent visibility. Asked about the recent questions of the concept, Consiglio answers without hesitation: movements like these of criticism and contestation only seek targets that are in evidence. According to her, “ESG came where it had to go, in the strategic discussion of the councils, in the leaders, and came by the hand of investors and the pain of the pandemic.” Consiglio says in her lectures that “in some moments, we will have to take two steps back and three steps forward, put on standby and wait – which I think is part of the process. Nevertheless, we should not question the goal itself. If we, or the world, conclude that SDGs are nonsense, that decarbonization does not make sense, and we’d better favor deforestation, then we have a problem.”

Another specialist in ESG and Communication, Natalia de Campos Tamura, professor and coordinator of sustainability courses at Aberje School, points out that there is still a lot of education for Brazilian companies to incorporate sustainability to be valid in their cultures and routines. “They use the trendy word, self-praise themselves, but it is not always that they know how to assess whether they do more or less than competitors and that basic that the market already demands,” she says. We are still at a point “incipient, very early on, which differs from a world agenda. In Europe, for example, we talk only about the environment, they talk a lot about climate change, a lot of emission, and we here have enormous potential, a huge amount of environmental wealth, but little takes ownership of it,” she says.

THE WAY TO GO

“It may be that ESG does not save the world, but not talking about ESG deprives us of new exits to our challenges,” says Tamura. This vision combines well with the other Brazilian voices presented in this report. But judging by the events in the United States, ESG will still have to dialogue with the fossil fuel lobby and politicians committed to representing their interests. Hopefully, it can win this battle and find the new paths mentioned by Tamura. After all, it is the future of the climate that is at stake.

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