ESG pressure on CFO decision-making

Economy and Society is Ballotpedia’s weekly review of the developments in corporate activism; corporate political engagement; and the Environmental, Social, and Corporate Governance (ESG) trends and events that characterize the growing intersection between business and politics.

ESG developments this week

In the states

Alabama anti-ESG legislation heads to Governor’s desk

On May 31, the Alabama House followed in the footsteps of the state senate, passing a far-reaching bill restricting the use of ESG in the investment of public funds. The bill now goes to the Governor’s desk:

The Alabama House of Representatives passed legislation Wednesday that would prevent state entities from doing businesses with companies that boycott other businesses for a variety of conservative stances.

This includes boycotting firearms companies, producers of fossil fuels, companies that fail to meet certain environmental criteria, and companies that don’t facilitate abortion or gender-affirming care.

Sb261 by Sen. Dan Roberts, R-Mountain Brook, is one of several sweeping the country in opposition to environmental, social and governance (ESG) criteria being used by companies to decide who to do business with—some conservatives have called it a “woke report card.”

“This bill requires companies that contract with the state to certify that they don’t boycott other companies based on any purpose other than ordinary business purposes,” said Rep. Chip Brown, R-Hollinger’s Island, who carried the bill in the House….

The bill passed 76-27 along party lines and now only needs a signature from Gov. Kay Ivey to become law in the state.

Summarizing the state of ESG and ESG pushback

As 2023 approaches the halfway point, ESG-oriented publications are beginning to take stock of the developments in the field thus far this year. State-level action by elected officials continues to dominate these developments and, therefore, to dominate publications’ recap efforts. Ryan Mills engaged in such a retrospective assessment on May 30 at National Review Online:

Despite reports that the effort is “backfiring” and has “few big wins,” at least eleven states have passed legislation this year to combat public-investment strategies that prioritize left-wing social and environmental goals over providing the best financial return for taxpayers.

Supporters of the conservative movement to bar public-asset managers from taking into account so-called environmental, social, and corporate governance factors, or ESG, say they’ve made great strides in the last two years building awareness of ESG and passing laws against it.

“We’ve come in the last year and a half from nothing to having a quarter of the states passing stuff and having half of the states engaging,” said Derek Kreifels, CEO of the State Financial Officers Foundation, a free-market non-profit that promotes fiscally responsible public policy. “To go from nothing to this in the last 18 months or so has been phenomenal.”…

Mainstream-news outlets have often portrayed the anti-ESG movement as floundering and failing. In February, the Washington Post reported that the “conservative battle against ‘woke’ banks is backfiring.” Bloomberg Law reported in April that the anti-ESG movement has gotten a lot of hype by has “few big wins” in statehouses.

But Catherine Gunsalus, director of state advocacy for Heritage Action, said the mainstream-media narrative that the anti-ESG movement is falling flat “couldn’t be further from the truth.”

“I think the math shows that,” she said. “I think they’re nervous on the other side of this that this movement to push back on ESG is actually being successful.”

The pushback against ESG only started a couple of years ago. In 2021, Texas lawmakers passed a law that bars the state from doing business with financial companies that favor renewable-energy firms over fossil fuels for environmental rather than financial reasons. “This bill sent a strong message to both Washington and Wall Street that if you boycott Texas energy, then Texas will boycott you,” Texas representative Phil King said during debate over Senate Bill 13.

Last year, West Virginia, Kentucky, Oklahoma, Tennessee, and Idaho followed suit.

“We’re not going to pay for our own destruction,” Riley Moore, the state treasurer from West Virginia, said of his state’s anti-ESG legislation, which takes aim at financial firms that “have weaponized our tax dollars against the very people and industry that have generated them to begin with. That is why we’re pushing back against this ESG movement.”…

This year, more than two dozen states introduced anti-ESG-style bills, and so far at least eleven – Arkansas, Florida, Idaho, Indiana, Kansas, Kentucky, Montana, North Dakota, Tennessee, Utah, and West Virginia – have passed and enacted some version. The various bills address the ESG issue from different angles: Many require that investment decisions involving taxpayer money be based solely on prospective financial returns, while others address government contracting, local bonds, and bank boycotts and discrimination….

Anti-ESG legislation hasn’t passed everywhere it’s been proposed. Democrats have defeated most anti-ESG bills in blue states, and in some cases have passed laws promoting the consideration of ESG factors in their investment decisions. Some conservative state legislatures, including in Mississippi and Wyoming, rejected anti-ESG bills this year.

A day later, on May 31, Thompson-Reuters published its own retrospective, detailing a slightly different path of the pushback against ESG:

A growing number of states are passing laws to restrict the use of environmental, social & governance (ESG) factors in making investment and business decisions. Proponents of these laws claim ESG threatens investment returns and uses economic power to implement business standards beyond those required by law.

Together, these new laws create an uneven regulatory patchwork that has already resulted in the divestment of billions of dollars in state funds from investment managers. Investors and businesses increasingly face a choice between complying with these new state laws and achieving the ESG goals promised to investors and stakeholders. New laws introduced in 2023 expand the scope of anti-ESG laws and present significant uncertainty for an increasing range of businesses.

Federal regulators and conservative lawmakers in some states are taking opposing approaches to defining the duties of fiduciaries. Investors making decisions using ESG frameworks include factors such as greenhouse gas emissions, which go beyond traditional fiduciary criteria like return on investment. The conflict reflects a philosophical disagreement between the belief that companies should work only to maximize returns, on one hand, and consideration of the interests of a wider range of stakeholders and outcomes, on the other.

In 2022, the U.S. Department of Labor (DOL) released a final rule addressing when fiduciaries may consider ESG factors in accordance with their fiduciary duties under the Employment Retirement Income Security Act of 1974 (ERISA). Under ERISA, retirement plan fiduciaries have a duty to act solely in the interest of plan participants and beneficiaries. The new rule clarifies that fiduciaries may consider ESG factors such as climate change and may select from competing investments based on collateral economic or social benefits. In late-January, 25 states filed a lawsuit in federal court seeking an injunction against the new rules.

Even before the release of the DOL final rule, several states proposed laws prohibiting the use so-called “non-pecuniary factors” in making investment decisions for state pensions and other funds. Earlier in 2022, the American Legislative Exchange Council introduced the State Government Employee Retirement Protection Act, model legislation that closely mirrors fiduciary duty bills later introduced in several states….

Several states have already started the process of divesting retirement system and other funds from financial companies they claim boycott fossil fuel companies. For example, a 2021 Texas law requires the State Comptroller to publish a list of boycotting companies. The Comptroller’s initial criteria for inclusion included membership in Climate Action 100 and the Net Zero Banking Alliance/Net Zero Asset Managers Initiative, two major financial industry initiatives focused on climate change.

Utah Governor Spencer Cox (R) signed a bill into law on March 15 that goes beyond state investments to prohibit companies from coordinating or conspiring with another company to eliminate viable options for another company to obtain a product or service “with the specific intent of destroying a boycotted company.” A boycotted company is defined by the law as one that engages in aspects of the firearms industry or does not meet certain ESG standards….

The volume of anti-ESG bills introduced in state legislatures is growing. Many are passing as the topic gains political salience, particularly on the political right. As these laws pass, they serve as models for similar legislation in other states. However, the success of future legislation faces significant headwinds.

On Wall Street and in the private sector

Philip Morris and ESG

The CEO of Phillip Morris has declared that his mission is to turn the cigarette manufacturer into an ESG company:

The chief executive of Philip Morris International says the maker of Marlboro cigarettes is charting a path to becoming an ESG stock as part of a push to win back investors that have shunned the stock because of tobacco exclusion policies.

PMI’s pivot away from cigarettes towards less harmful vapour-based nicotine alternatives, which accounted for about a third of its revenues last year, placed the tobacco group’s new product line “on the podium” when it came to environmental, social and governance impact, argued Jacek Olczak….

Speaking to the Financial Times, Olczak said there had been tentative re-engagement from some funds including one-to-one meetings with PMI’s investor relations team, although he did not specify which ones.

“I’m not saying that they are building a position in Philip Morris . . . but the asset managers will not spend the time on talking with you if they don’t have in mind that one day is coming that they should reconsider the exclusion [policy],” he said.

When asked if he believed that PMI in the future could be classified as an ESG stock because of its push away from cigarettes, Olczak responded: “I think so.”

Notable quotes

CFO’s feel ESG pressure

Last Thursday, published the results of a survey of corporate executives which suggest that ESG may be playing an outsized and unjustified role in their decision-making:

As CFOs and their executive teams look to hit Q2 goals, while looking ahead to Q3 challenges, pressures in the environmental, social, and corporate governance (ESG) space may be drawing productivity away from their organizations’ limited resources.

The corporate equality index (CEI), a rating system separate from revenue and brand recognition, pushes to drive conversations around diversity, equity, and inclusion (DEI) in the workplace. Its emergence is evidence of the continued expansion and ambiguity of ESG and its subsets.

These areas, many of which have their own leadership — some even in executive roles — desire quick changes to internal and external operations. Those changes, according to data, are putting pressure on many leaders who already have their hands full.

According to CFO’s 2023 Q2 outlook report, all executives, not just CFOs, feel the pressures of ESG adherence.  Nearly all (94%) of executives surveyed said they strongly or somewhat agree that they feel external pressure to prioritize ESG initiatives at their companies.