A Critical Look at the Politicization of ESG


When compared to the regulatory response, capital markets reacted quickly to changing environmental needs and trends.[1] The speed the markets moved resulted in the politicization of Environmental Social Governance (ESG) and the dilution of ESG’s intended mission.[2]

Arguably, the intention behind ESG was to instill a more comprehensive understanding of sustainability. In addition to environmental factors, ESG also encompasses principals of health, safety, corporate social responsibility, etc.[3] However, ESG has largely been casted as a leading left-wing initiative because few understand the full scope of ESG’s objectives.[4] I will highlight the main political views surrounding ESG.

ESG has been weaponized by right-wing conservatives, who view ESG as part of a “woke capitalism”[5] liberal agenda.[6] Republican critics of the ESG strategy insist it “unfairly puts a finger on the market scale in a way that benefits Democratic priorities.”[7] Some GOP officials insist that ESG investing “creates a disadvantage for industries like coal, oil, and natural gas[.]”[8] They also argue that by adopting ESG policies, banks are merely giving in to left-wing lobbyists.[9] Moreover, the legislature in Texas and West Virginia has taken steps to curb ESG, enacting laws that they will no longer work with banks that do not support their states’ industries.[10] Texas Comptroller Glenn Hega explained, “[t]he environmental, social and corporate governance (ESG) movement has produced an opaque and perverse system in which some financial companies no longer make decisions in the best interest of their shareholders or their clients, but instead use their financial clout to push a social and political agenda shrouded in secrecy.”[11] Critics of “woke capitalism” argue that corporations’ focus is better placed on increasing shareholder returns.[12]

Similar pushback was seen in 2021 letter written by a group of attorney generals to BlackRock’s CEO, Larry Fink.[13] In their letter, the attorney generals argued that BlackRock’s commitment to accelerate net-zero emissions across all of its assets was politically motivated and unfair to clients that do not want to invest in the energy transition.[14] Though Fink has maintained the attorney generals’ concerns were unfounded—based on misinformation and political theatrics—the views expressed in the letter, nonetheless, continue to pervade the ring-wing party.[15]

While left-wing individuals stand on the opposite side of this debate, they are complicit in their approach to politicized ESG.[16] The left-wing has capitalized on the benefits that ESG provides, both in terms of the GDP and investment trends.[17]

However, recent proposals in Congress from the left would add new responsibilities to public companies. Rather than ensuring that managers focus on building good and profitable companies, new proposals include the utilization of metrics that would require public companies to prioritize considerations of climate change and diversity.[18] These proposals are in addition to existing mandates imposed by the U.S. Securities and Exchange Commission (SEC) that require publicly companies to disclose climate-related information in their registration statements and reports.[19]

Though it is unlikely that the SEC is weaponizing ESG per se, they have arguably failed to establish a workable solution for companies. While the SEC provides a safe harbor for companies that precludes the disclosure of certain information regarding emissions,[20] the SEC fails to define precisely what they want these companies to do with ESG within their funds.[21] Additionally, by mandating companies to report on their ESG efforts, this approach partly conflicts with the companies’ fiduciary responsibilities to their shareholders.[22]

Arguably, the weaponization of ESG can be—at least partially—attributed to the flawed ESG metric reporting that has been established.[23] According to a Stanford study, the ESG rating system that is used by third parties is flawed because it relies on oversimplified metrics, as well as incomplete and inconsistent data.[24] For example, consider Exxon’s current ESG rating, designating Exxon as “high risk.”[25] In effect, this rating implies that Exxon is a non-ecofriendly company. However, the rating fails to convey that Exxon has made substantial efforts to improve its environmental practices.[26] As mentioned before, change is a gradual process.[27] While the effects of such ratings may not be profound, they arguably create a negative public perception of the company. Though the left-wing has heavily pushed to abolish big oil because of fossil fuel concerns,[28] I would argue that this policy of sanctioning or abolishing companies with poor ratings is dangerous because we need these companies.

While ESG ratings convey important insights, there is concern that ESG initiatives are being rolled out too quickly and without accountability.[29] Consequently, some companies are using ESG deceptively.[30]  Companies have been accused of “greenwashing,” which is when a company passes itself off to the public as forward-looking and socially responsible.[31] For example, Keurig was fined $3 million for misleading buyers in Canada about the recyclability of their single-use coffee pods.[32]

Finally, the Russia’s invasion of Ukraine exposed the limitations and contradictions in sustainability and impact investing.[33] Investors, who divested from oil companies and chose to invest in more sustainable/ESG funds instead, lost money when oil prices skyrocketed.[34] As a result of the invasion, investors realized they should not entirely divest from high-impact sectors because doing so can significantly affect their portfolios and the market.[35] Thus, investors can decarbonize without divesting from high-impact energy companies. Additionally, as mentioned by Faye Kilburn, “energy has conveniently underperformed over the past decade,” and so those lucrative strategies to divest quickly from the fossil fuel industry have looked like they perform well.[36] She went on to note, however, that although these corporations took a short on energy, the tensions in Ukraine exposed these impact investments.[37]

Although awareness of ESG has increased because it is frequently seen in headlines, actual understanding of ESG is arguably quite low. Due to widespread confusion, as well as the tendency for political pundits to conflate stakeholder capitalism with ESG and “woke capitalism,” it is essential for companies to focus on educating stakeholders on what ESG is and is not. Similarly, by educating policymakers on the concept, there is a fleeting opportunity to depoliticize ESG and dampen those voices who seek to punish corporate America. Concerted efforts by corporations to educate stakeholders about how ESG strategies address key issues of importance for all stakeholders would be an excellent first step in this achieving goal. Many ESG-focused efforts are financially material as they have important implications for long-term value creation, but political narrative often undermines this reality. This highlights the need for companies to speak specifically to investors about their ESG initiatives and link them to financial benefits. It is easy to tar ESG as a left-wing, radical, or fringe policy threatening responsible corporate management. However, as noted earlier, defining what ESG investing is and what companies and countries should be doing has caused this political divide.[38] Generally, I believe ESG can be a valuable and effective measure to ensure that we can make our country more sustainable and profitable, benefitting both sides of the sphere.

[1] See Jay Surti & Tobias Adrian, Capital Markets Regulation Is Stronger, but Some Gaps Still Must be Closed, IMF Blog (June 29, 2022), https://www.imf.org/en/Blogs/Articles/2022/06/29/capital-markets-regulation-is-stronger-but-some-gaps-still-must-be-closed.

[2] See Michael Copley, How ESG investing got tangled up in America’s culture wars, NPR (Sept. 12, 2022, 5:00 AM), https://www.npr.org/2022/09/12/1121976216/esg-explained.

[3] See Sara Rowland, What Does the ‘S’ in ESG Mean? Explaining Social Criteria for Today’s Businesses, Antea Group (Nov. 2, 2021), https://us.anteagroup.com/news-events/blog/esg-social-criteria-diversity-health-safety.

[4] See Jeff Green & Saijel Kishan, America’s Political Right Has a New Enemy No. 1: ESG Investors, Bloomberg (May 20, 2022, 6:00 AM), https://www.bloomberg.com/news/articles/2022-05-20/why-esg-investing-is-under-republican-attack.

[5] Id. (discussing how “woke capitalism” is used as a derogatory term in the context of ESG)

[6] See id.

[7] See Stephanie Ebbs, What are ESG and ‘woke capitalism’? State treasurers weigh in on fight over where tax money goes, ABC News (Oct. 12, 2022, 2:06 PM), https://abcnews.go.com/Politics/esg-woke-capitalism-state-treasurers-weigh-fight-tax/story?id=91114475.

[8] See id.

[9] See id.

[10] See Meg Cunningham, Model Legislation Targets Banks that Divest from Fossil Fuel Companies, ABC News (Dec. 22, 2021, 3:23 PM), https://abcnews.go.com/Politics/model-legislation-targets-banks-divest-fossil-fuel-companies/story?id=81865813.

[11] Texas Comptroller Glenn Hegar Announces List of Financial Companies that Boycott Energy Companies, Tex. Comptroller Pub. Accounts. (Aug. 24, 2022), https://comptroller.texas.gov/about/media-center/news/20220824-texas-comptroller-glenn-hegar-announces-list-of-financial-companies-that-boycott-energy-companies-1661267815099.

[12] See Veronique De Rugy, ‘Woke Capitalism’ Does Not Advance Social Justice, Reason (May 26, 2022, 4:49 PM), https://reason.com/2022/05/26/woke-capitalism-does-not-advance-social-justice/; Neal Hartman, Social responsibility matters to business – A different view from Milton Friedman from 50 years ago, MIT Mgmt. Sloan Sch. (Jan. 11, 2021), https://mitsloan.mit.edu/experts/social-responsibility-matters-to-business-a-different-view-milton-friedman-50-years-ago (“Friedman argued that returning value to shareholders was the primary responsibility of business and suggested that “Greed is Good.”).

[13] See Larry Fink’s 2021 letter to CEOs, BlackRock, https://www.blackrock.com/us/individual/2021-larry-fink-ceo-letter (last visited Feb. 18, 2022, 12:51 PM).

[14] See Lydia Moynihan, BlackRock faces scrutiny from 19 state AGs over ESG investments, N. Y. Post (Aug. 16, 2022), https://nypost.com/2022/08/16/blackrock-faces-scrutiny-from-19-state-ags-over-esg-investments/.

[15] See Nell Minow, Larry Fink: Here’s Your Answer to the Despicable Letter from the GOP Attorneys General, Medium (Aug. 31, 2022), https://cranberries.medium.com/larry-fink-heres-your-answer-to-the-despicable-letter-from-the-gop-attorneys-general-68e154e81c9e.

[16] Mandy Gunasekara, Social Justice Warriors Pushing ESG On Wall Street Have Deep Ties To Political Left, Indep. Women’s F., (Sept. 7, 2022), https://www.iwf.org/2022/09/07/social-justice-warriors-pushing-esg-on-wall-street-have-deep-ties-to-political-left/.

[17] See generally Catriona Marshall et al., Org. Econ. Coop. & Dev., ESG Investing and Climate Transition: Market Practices, Issues and Policy Considerations (2021).

[18] See id.

[19] Hester M. Pierce, We are Not the Securities and Environment Commission – At Least Not Yet, SEC: Statement (Mar. 21, 2022), https://www.sec.gov/news/statement/peirce-climate-disclosure-20220321; SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures for Investors, SEC: Press Releases (Mar. 21, 2022), https://www.sec.gov/news/press-release/2022-46.

[20] Scope 1 and Scope 2 Inventory Guidance, EPA, https://www.epa.gov/climateleadership/scope-1-and-scope-2-inventory-guidance (last visited Feb. 18, 2022, 12:59 PM) (discussing the EPA’s guideline on what constitutes scope 1, 2, and 3 emissions) [hereinafter EPA Guidance]; see also SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures for Investors, SEC: Press Releases (Mar. 21, 2022), https://www.sec.gov/news/press-release/2022-46 (The safe harbor provided by the proposed rule).

[21] See Robert E. Plaze et al., SEC Proposes ESG Reporting and Disclosure Requirements for Private Fund Adviser, Proskauer Rose LLP (June 13, 2022), https://www.proskauer.com/alert/sec-proposes-esg-reporting-and-disclosure-requirements-for-private-fund-advisers (addressing ambiguity surrounding the rule related to private funds).

[22] See Douglas P. Baumstein et al., Navigating Fiduciary Duties amidst the Rise of Anti-ESG Rulemaking, Mintz LLP (Feb. 15, 2017), https://www.mintz.com/insights-center/viewpoints/2023-02-15-navigating-fiduciary-duties-amidst-rise-anti-esg-rulemaking (“Caught in the crosshairs of this political divide are fiduciary investors, including some of the nation’s largest financial institutions, whose investing practices may run afoul of new pro- and anti-ESG state laws.”).

[23] See generally EPA Guidance, supra note 20.

[24] See generally David F. Larcker et al., ESG Ratings: A Compass without Direction (Aug. 2, 2022) (Forthcoming Working Paper) (on file with the Rock Center for Corporate Governance at Stanford University), https://ssrn.com/abstract=4179647.

[25] Company ESG Risk Ratings: Exxon Mobil Corp., Sustainalytics, https://www.sustainalytics.com/esg-rating/exxon-mobil-corp/1008284584 (last visited Feb. 18, 2022, 1:16 PM).

[26] Sustainability Performance Data, ExxonMobil, https://corporate.exxonmobil.com/sustainability/sustainability-report/performance-data-table (last visited Feb. 23, 2022 3:13PM) (Exxon data on sustainable improvements throughout the company).

[27] See Environmental Initiatives, ExxonMobil, https://corporate.exxonmobil.com/sustainability/environmental-protection/environmental-initiatives (last visited Feb. 18, 2022, 1:17 PM) (Exxon statement to provide more ecofriendly and sustainable practices for the future).

[28] Lisa Firedman & Glenn Thrush, Liberal Democrats Formally Call for a ‘Green New Deal’, Giving Substance to Rally Cry, NY Times (Feb. 7, 2019), https://www.nytimes.com/2019/02/07/climate/green-new-deal.html.

[29] Brian Tayan, ESG Rating: A Compass without Direction, Harv. L. Sch. F. (Aug. 24, 2022), https://corpgov.law.harvard.edu/2022/08/24/esg-ratings-a-compass-without-direction/.

[30] Allison Herren Lee, It’s Not Easy Being Green: Bringing Transparency and Accountability to Sustainable Investing, SEC: Statement (May 25, 2022), https://www.sec.gov/news/statement/lee-statement-esg-052522.

[31] See id. (explaining how the SEC defines “greenwashing”).

[32] Zoryana Cherwick & Bronwyn Roe, Keurig’s $3 million fine highlights the pervasive issue of greenwashing, Ecojustice (Jan. 14, 2022), https://ecojustice.ca/news/keurigs-3-million-fine-highlights-the-pervasive-issue-of-greenwashing/; see also Greenwashing: 11 recent stand-out examples, Akepa: Blog (July 23, 2021), https://thesustainableagency.com/blog/greenwashing-examples/ (highlighting ten other companies who were fined for greenwashing in 2022).

[33] Faye Kilburn, Ukraine war exposes risks in ‘naive’ ESG investing, Risk.net (Dec. 2, 2022), https://www.risk.net/investing/7955267/ukraine-war-exposes-risks-in-naive-esg-investing.

[34] See Noah Browning, Russian supply blow shakes global oil output picture – IEA, Reuters (Mar. 16, 2022), https://www.reuters.com/business/energy/russian-supply-blow-shakes-global-oil-output-picture-iea-2022-03-16/; Noah Browning, Tighter oil market confirmed by IEA demand revision, Reuters (Feb. 15, 2022, 12:19 AM), https://www.reuters.com/business/energy/tighter-oil-market-confirmed-by-iea-demand-revision-2022-02-15/; Muqsit Ashraf, The war in Ukraine: A moment of reckoning for the oil and gas industry, Accenture (May 10, 2022), https://www.accenture.com/us-en/insights/energy/ukraine-oil-gas; Matt Wirz, Russia War in Ukraine Exposes Weakness in ESG Fund, Wall St. Journal (Apr. 1, 2022, 7:00 AM), https://www.wsj.com/articles/russia-war-exposes-weakness-in-esg-fund-11648765019.

[35] See Wirz, supra note 34.

[36] Kilburn, supra note 33.

[37] Id.

[38] Gro Harlem Brundtland, Report of the World Commission on Environment and Development: Our Common Future, U.N. Doc. A/42/427 (Aug. 4, 1987).


About Author

Comments are closed.

Fordham Journal of Corporate & Financial Law