Dive Brief:

• Sixty-one percent of U.S. companies expect the backlash against environmental, social and governance best practices to persist or intensify during the next two years, yet most firms do not plan to retreat from their ESG commitments, the Conference Board said.
• Thirty-one percent of companies deem state-level officials and political candidates as the most outspoken ESG critics, the Conference Board found in a survey of 125 companies, half of which generate annual revenue exceeding $10 billion. One out of five companies (21%) view officials and political candidates at the federal level as the sharpest ESG opponents.
• About half of the companies have faced a backlash, and 63% of those firms have more closely linked ESG to shareholder value, the Conference Board said.

Dive Insight:

Democratic lawmakers, Biden administration regulators and ESG activists have called in recent years for more transparency on climate risk and other points of sustainability, triggering opposition from Republican legislators, business organizations and several state governors.

ESG critics have primarily targeted financial services companies, the Conference Board said, noting that “asset managers in particular have been perceived as the gatekeepers of ESG investing.”

State officials in conservative states have directed capital away from asset management firms that promote sustainable investing. Florida, Oklahoma, Texas, West Virginia and several other GOP-controlled states have said some asset managers are pushing an ESG agenda at the expense of investor returns.

State officials say ESG principles are not relevant to investment decisions and have barred BlackRock and other asset managers that use ESG benchmarks from handling state pension funds.

Governors from 19 states pledged in March to use “state pension funds to force change in how major asset managers invest the money of hard-working Americans, ensuring corporations are focused on maximizing shareholder value rather than the proliferation of woke ideology.”

“The proliferation of ESG throughout America is a direct threat to the American economy, individual economic freedom and our way of life, putting investment decisions in the hands of the woke mob to bypass the ballot box and inject political ideology into investment decisions, corporate governance and the everyday economy,” the governors said in a joint statement.

Republican lawmakers in Washington stepped up their opposition to ESG activism last month, saying such pressure harms Main Street investors and thwarts company efforts to increase shareholder value.

In six hearings, the Republican-controlled House Financial Services Committee probed the relationship of proxy advisory firms to shareholder activism, how environmental and social policy may influence financial regulation and whether ESG activism drives up the costs for insurance and housing.

Responding to criticism, companies have focused on value creation and changed the terms they use when communicating about ESG, the Conference Board said.

For example, in an annual letter to shareholders, BlackRock CEO Larry Fink trimmed his use of the terms “climate,” “ESG,” “sustainability” and “purpose” to four this year from 32 in 2020, the Conference Board said.

“It is important for companies to avoid dramatic shifts in how they talk about ESG issues,” the Conference Board said. “Abrupt changes can create the perception that the company is either succumbing to political pressure or was not genuinely committed in the first place.”

Companies should consider handling opposition to ESG, the Conference Board said, by taking six steps:

1. Align ESG with business strategy. “The most effective response is to ensure the company’s ESG positions align with the company’s core business strategy, are supported by empirical data and serve the long-term welfare of the company, its stakeholders and society,” Paul Washington, executive director of the board’s ESG Center, said in a statement.

2. Reach out to policymakers. Companies should privately meet with state and federal policymakers to describe how their ESG strategies benefit constituents and advance business objectives.

3. Stay involved in the public conversation. Nearly one out of three companies that have faced an ESG backlash have muted external communication on environmental and social issues. “This runs the risk of forfeiting the opportunity of telling the company’s story to stakeholders who are focusing on ESG for the first time,” the Conference Board said.

4. Avoid big shifts in ESG messaging, explaining any changes. Nearly half (48%) of companies that have faced a backlash have altered their terminology, with many switching from ESG to “sustainability.”

5. Join forces with other companies to make the case for ESG. Cooperative efforts increase the volume and reach of ESG messaging.

6. Keep in mind that ESG principles remain valid. “There are strong forces in capital, labor, business-to-business and consumer markets that justify a continued focus on ESG,” the Conference Board said. Emerging disclosure and compliance obligations in the U.S. and Europe also require companies to devote resources to tracking ESG performance.