ESG developments this week
Economy and Society is Ballotpedia’s weekly review of ESG stories that characterize the growing intersection between business and politics.
In the states
Missouri withdraws appeal in ESG lawsuit
Missouri Attorney General Andrew Bailey (R) announced the state will withdraw its appeal of a court ruling overturning two anti-ESG investment rules. The rules would have penalized asset managers who invested based on ESG factors without the written consent of their clients. The withdrawal leaves the constitutional question for similar rules unsettled in U.S. courts:
Last month, a federal district court struck down Missouri’s anti-ESG rules that would prohibit investment advisors from utilizing ESG factors when making investment decisions (absent written consent of the client). Specifically, the court awarded summary judgment to SIFMA, a trade association that had challenged the anti-ESG rules, and held that the rules violated the U.S. Constitution.
Missouri had elected to appeal that ruling to the Eighth Circuit. However, the Missouri Attorney-General has now abandoned that appeal, dooming the anti-ESG rules previously championed by Missouri. (As part of the agreement to end the appeal, SIFMA is receiving only $500,000 in legal fees–rather than the $1.3 million in legal fees it had originally sought.)
While there is now no opportunity for the specific anti-ESG rules Missouri had promulgated to be revived, the decision to abandon the appeal also means that the Eighth Circuit will not have the opportunity to opine on the legality of these rules–and so avoids the prospect of a legal judgment that would devastate the anti-ESG political project.
On Wall Street and in the private sector
J.P. Morgan sustainable investment chief argues support for ESG remains strong
At the Reuters Energy Transition Conference in London last week, Chuka Umunna—the head of sustainable investing for J.P. Morgan—argued support for ESG investing remains strong in America despite opposition:
“If you peel away all the noise and look at what investors are doing, it isn’t so different, albeit they may not be using the labels quite in the way that we do in Europe,” Umunna, who is also the bank’s regional head of green economy investment banking, said. “The U.S. is not so much pulling back because of the weaponisation of the term ESG, the reality in the States is more complex than that.”
A host of U.S.-based investors, including the fund arm of JPMorgan, have pulled back from global climate coalitions this year amid a tense political backdrop as some U.S. Republican politicians said membership could breach antitrust rules.
Despite that, Umunna noted while more anti-ESG resolutions were proposed during the most recent proxy-voting season, less than 2% actually passed.
Pitchbook survey suggests asset managers still consider ESG factors
A new survey from Pitchbook found that ESG goals are still significant considerations for many investment managers, even as some corporations—including BlackRock—have avoided using the term:
Perceptions aren’t reality for sustainable investors. That’s our conclusion after poring through more than 500 survey responses of investors in private markets, or securities that aren’t publicly traded, such as private equity. For example, while environmental, social, and governance approaches to investing are alive and well, “ESG” as a term may be on shakier footing.
We asked our asset managers (general partners in common private equity language) and our allocators (limited partners or in common private equity language) 1) whether they were increasing or decreasing their focus on sustainable investment and 2) how they thought the other was acting. It was clear that most who are already practitioners of ESG or impact investing are sticking with their approach. And a decent number are increasing focus there. But for many, the perception on each side, no doubt fed by the negative news coverage, is that the other was decreasing. Things are not as they appear! …
In our survey, we asked those who said they have previously incorporated DEI into their investment decisions what their perspective is in light of the US court rulings. The vast majority of these respondents, in the US and around the world, selected “DEI initiatives are still necessary and will be implemented and/or advocated for throughout our organization and/or portfolio.” Very few said that DEI initiatives are no longer necessary.
Shareholder proposal withdrawals drop to 10-year low
The number of shareholder proposals withdrawn before voting fell to a 10-year low this past shareholder season. Shareholders on both sides of the ESG issue often use proposals to engage companies to consider their corporate policy preferences. Withdrawals can indicate that filers reached an agreement with the company directly ahead of a vote, making it one measure of corporate engagement:
The proportion of ESG shareholder proposals withdrawn by proponents has fallen to a 10-year low, according to data from the Sustainable Investments Institute (Si2), with the US non-profit finding that 29 percent of those filed at US companies in 2024 were rescinded or not voted on, compared with 44 percent in 2020, 2021 and 2022.
It comes as average support for ESG shareholder proposals has fallen for the third consecutive proxy season to 19 percent in 2024 from a record high of 33 percent in 2021.
Shareholder proposals are often withdrawn because an agreement has been reached between the company and filer. High levels of support for resolutions in previous proxy years or at peers are often cited by filers as useful in pushing firms to make commitments.
From the ivory tower
Study argues executive ESG bonus benchmarks are easy to hit
A new paper written by Adam Badawi and Robert Bartlett—law professors at the University of California Berkeley and Stanford, respectively—showed most American corporations used ESG incentives in executive pay packages. The authors argued the criteria may lack rigor and are easy to meet:
While the demand for firms to promote ESG values may be pulling back from its highest peaks, ESG performance still motivates the investment decisions of many institutional investors. One way that these investors can incentivize performance for their portfolio firms is to insist that companies link executive pay to the achievement of favored ESG outcomes. And in recent decades, they have done so. The number of S&P 500 firms that have tied some element of executive compensation to ESG performance has ballooned from about 12% in 2004 to about 63% in 2023. …
We also determine whether executives met or missed both the financial and ESG targets connected to their annual bonuses. Financial targets are nearly always hard targets that are tied to measures such as revenue and profitability. In general, they appear to be set at levels that are not easy to hit, which would explain why executives missed all of their financial targets 22% of the time in our sample. ESG targets, it appears, get set in a different way. We find that, of the 247 firms that disclose an ESG performance incentive, only 6 of them reported missing every target. That is, 98 percent of them met at least one ESG target. Similarly, we find that 44% of firms met or exceeded all of their financial targets while 76% of firms met or exceeded all of their ESG targets.
We ask whether this high rate of ESG achievement is due to excellent ESG performance or whether it is a product of inadequate corporate governance. We cannot, of course, measure the executives’ ESG performance directly, but we are able to find some suggestive associations. We first analyze whether meeting or exceeding all ESG goals is associated with an increase in firms’ ESG scores. Using three different measures of ESG performance, we find no statistically significant association between attaining ESG performance goals and improvements in ESG scores. We next examine whether there is an association between whether a company meets or exceeds all of its ESG targets and the level of shareholder support that executives receive during the annual say-on-pay vote. Here we do find a statistically significant negative association. This evidence is consistent with the theory that ESG targets are set at levels that reflect weak corporate governance. That is, they may be set at levels that are low to allow executives to reap their rewards even if ESG performance is not particularly strong.