ESG Explained: Socially Conscious Capitalism and Its Backlash

on January 26 2021 Larry Fink the CEO of the world's largest asset manager BlackRock pushed send on his annual letter to clients Larry Fink of BlackRock sent a letter out to the world saying that ESG is a priority for the asset manager and really was looking to encourage companies to embrace ESG I believe there will be a future Eric that all Investments are going to be looked through sustainability this term ESG is at the center of a heated debate over whether socially conscious goals should factor into business and investing decisions ASG has become so politicized BlackRock is the police of this ESG movement BlackRock is coming under Fire from so many different directions Larry Fink calls it stakeholder capitalism conservative critics call it woke capitalism yet no one is in complete agreement on how to evaluate ESG Clara Hudson and Andrew ramonis report on ESG for Bloomberg law Andrew focuses on the E environment greenhouse gas emissions things like how severe weather impacts businesses and Clara reports on the S stands for the social side the relationships that companies have with their employees union rights diversity even abortion access the G stands for governance the structure of the board for example or diversity even executive pay they're here to unpack what you need to know about ESG and why it's become such a lightning rod I think a lot of people have a big misunderstanding about what ESG is for some it's being socially conscious and you're investing it's really all about business having some corporate responsibility the value for shareholders and how thinking about climate risk or other kinds of risk can actually impact the bottom line so who decides what issues ESG efforts should focus on how are companies judged what are the rules and who enforces them that's where things get murky there really is not a lot of regulation for ESG anyone can kind of take a piece of it whether it be the Securities Exchange Commission the Federal Trade Commission start with the ratings private ranking and rating companies track how well a company is doing on ESG but in the absence of Regulation they're free to make up their own criteria and evaluation systems to find out how well a company's doing environmentally investors have to look to their disclosures ESG specific measures haven't been mandatory on public filings there often found in unofficial reports oftentimes they'll put on their website's sustainability reports or corporate responsibility reports so these glossy papers that talk about how good they are on ESG but those reports can be misleading a major complaint of those who support ESG efforts is that a lack of concrete reporting metrics leads to corporations embellishing and even greenwashing their efforts that's where the government has begun to step in the ESG task force is the Securities Exchange commission's answer to how to ensure that investors aren't being misled by ESG claims and in one of the biggest moves yet to add some regulatory heft the Securities Exchange Commission is working on rules right now that would require companies to make disclosures about how climate change affects them and that includes reporting their greenhouse gas emissions it's not just the SEC the Department of Labor is also rolling out rules that allow companies to consider ESG factors when they create retirement plans for their employees overseas the European Union is moving even quicker than the U.S on creating guidelines over ESG starting fiscal 2024 the EU will demand sustainability reports and audits from all companies operating there while the environment gets the most attention the debate over ESG is increasingly encompassing hot button social and culture War issues take Tesla the company is rated highly on the e-portion but due to discrimination claims and reports of unsafe working conditions the S and G portions tanked Tesla's 2022 rating the company dropped so low that it was excluded from the s p 500's ESG index Elon Musk was not amused why the Uproar over ESG now after all socially conscious investing has been around for years in the 1980s boycotts pressured companies over supporting South Africa's apartheid regime but the term ESG wasn't adopted until decades later the term ESG was first used in a un report in 2004. since then it's taken about a decade or so for the term to really catch on but it has absolutely rocketed into the mainstream which brings us to the backlash BlackRock and its CEO Larry Fink have really become kind of a symbol for the Republican politicians that are against ESG and what they're saying is that BlackRock is using other people's money to pursue their social values state Republican leaders pulled out billions in Pension funds from asset managers like BlackRock that publicly support ESG and they're working on laws to fight back they argue that pursuing social goals goes against their clients financial interest in the coming years there's a lot to be determined there's rules that'll be fun the courts Republican politicians are going to ramp up their attacks on ESG in reality I don't think that companies are actually going to pull away from ESG because their stakeholders and employees are calling for it and because they really do think that it makes good business sense just last year in the United States our clients entrusted us with an additional 230 billion dollars so you tell me 4 billion out and 230 in the U.S [Music]

Channel: Bloomberg Law

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Length: 7min 2sec (422 seconds)

Published: Tue Mar 07 2023