The attack on an ill-defined concept called “woke” public policy has now been extended to attacking managers and investors who have the “nerve” to pay attention to a company’s environmental footprint, organizational governance practices and social and community impact. In my view, a company managing with these issues in mind is practicing sound management. The way I see it, “woke” is simply being awake and aware of the world we live in. Opposing such awareness is simply sticking your head in the sand and sleepwalking through a complex, rapidly changing world economy. Those are your choices: being awake or falling asleep. Let’s examine ESG as a management concept rather than as an element of ideology.
Starting with environmental impact and risk, a company that does not understand and measure its impact on ecosystems as well as the risk to operations posed by climate change and climate accelerated extreme weather events is a poorly managed operation. Fossil fuel companies and shipping companies have extreme exposure to environmental and climate risks. If you doubt my assessment of fossil fuel ecological risk, ask BP about the cost of their 2010 Gulf of Mexico disaster. If you question the need to understand transport risk, ask Norfolk Southern how much they think the derailment in East Palestine, Ohio is going to cost them and their shareholders. Moreover, we live on a more crowded and interdependent planet and every organization must be cognizant of the potential liability they could incur if they poison their neighbors or customers. An organization that understands its exposure to environmental risk is likely to be better at understanding and managing its exposure to other risks. By cutting railroad staff and fighting safety rules, Norfolk Southern seemed to be inviting risk: Shouldn’t an investor be aware of these practices? Better awareness of risk should lead to lower levels of risk and less exposure to catastrophic financial loss.
Next let’s think about a corporation’s governance structure and its hiring practices. An organization that privileges one race, gender, religion, sexual orientation, or national origin over another reduces the pool of talent it can draw on to staff and manage the operation. We are in a brain-based economy. The high value-added parts of the economy and the greatest profits are in the organizations or parts of organizations that are creative, analytic, and innovative. There’s more money in software than hardware. As products become commodities, they are subject to competitive forces that tend to limit profits. That is why IBM stopped making personal computers. A diverse board and diverse workers will provide the benefit of more brainpower and different life experiences to address organizational challenges. A less diverse organization tends to stimulate insularity and group think. Being awake and aware of the value of diversity is an indicator of management excellence. In a global competition for innovation, customers, and profits, a diverse team that is built on the best talent is likely to beat the team that is more homogeneous but less talented.
Finally, there is the issue of an organization’s ability to understand and address its impact on the community it operates in. Amazon tried to locate its HQ2 in Long Island City, New York, but misunderstood the political climate, got greedy and negotiated a $3 billion siting subsidy from New York. The community and local politicos were enraged and eventually the political opposition in New York compelled Amazon to site their operation in suburban Washington, D.C. Of course, since then, they’ve halted construction of HQ2 and quietly added thousands of staff to sites scattered around New York City. But the damage to the company’s image was real and not an indicator of sophisticated management. Shaking down a city with 60,000 homeless people seems a little ridiculous from a company as rich and successful as Amazon.
Recently, we saw another horrific example of terrible corporate-community relations after the catastrophic train accident in Ohio. Norfolk Southern and the U.S. government were slow in responding to the toxic accident. They misplayed their engagement with the community and compounded the physical and environmental disaster with a complete failure of community relations. Residents are traumatized and correctly believe they were mistreated by a large and successful corporation. Coupled with government’s regulatory and response failure the combination of private and public incompetence exacerbated the damaged suffered by the community.
Modern organizations with instant communications, and high-speed transmission of information are correctly expected to move quickly to respond to disaster. The absence of capacity to interact with the local community is another indicator of terrible management. Yes, the railroad is making money. But for how long with such poor safety practices and inadequate capacity to manage community relations? The company seemed to be improvising their response in Ohio instead of implementing a carefully planned post-disaster clean-up and community relations program. The East Palestine case does not make one want to run out and buy shares in Norfolk Southern.
In my view ESG investing is not about political ideology but effective and competent management. I recognize that some ESG investing is about ideology. Corporations are about profit not social justice. But the path to profit in the modern world requires the management skill demonstrated by companies that pay attention to ESG impacts. Moreover, the effort to prevent investors from understanding environmental risk factors is unbelievably misguided. The politicization of ESG investing is real and is likely to result in President Biden’s first veto. According to David Gelles of the New York Times:
“More than $18 trillion is held in investment funds that follow the investing principle known as ESG — shorthand for prioritizing environmental, social and governance factors — a strategy that has been adopted by major corporations around the globe. Now, Republicans around the country say Wall Street has taken a sharp left turn, attacking what they term “woke capitalism” and dragging businesses, their onetime allies, into the culture wars. The rancor escalated this week as Congress entered the fray. Republicans used their new majority in the House on Tuesday to vote, 216 to 204, to overturn a Department of Labor rule that allows retirement funds to consider climate change and other factors when choosing companies in which to invest. The Senate followed on Wednesday, as two Democrats, Senators Joe Manchin III of West Virginia and Jon Tester of Montana, joined Republicans in a 50-to-46 vote to send the resolution to President Biden’s desk. The White House has said Mr. Biden will block the resolution, in what could be the first veto of his presidency.”
It is indeed ironic that promarket, conservative political ideologues have picked an $18 trillion piece of the capital finance market to attack and try to regulate. The “anti-woke” folks are demonstrating their ignorance of both finance and management. These pundits and politicos are plunging into a piece of the private sector they simply do not understand. Some of the attack on ESG is coming from fossil fuel companies because they are losing the competition for capital to renewable energy companies. Fossil fuel companies have long been effective at lobbying and propaganda and their political influence is far greater than their economic power. Fossil fuels will be needed for another generation but there will come a point when they will be as common as video cassettes. New technology is displacing old technology and these companies will either adapt or die. I have never been particularly interested in the movement to divest from fossil fuels, since I have assumed that the market would eventually discover that fossil fuels are a dying industry. That seems to have begun. It is not surprising that members of Congress like Joe Manchin, from states and districts where fossil fuel businesses are located, want to help those companies stay in business. But they would be better off encouraging them to transition to renewable energy rather than doubling down on “drill baby drill.”
While the right wing is working overtime to politicize ESG, major corporations are working to incorporate sustainability into management and governance. The Wall Street Journal’s Dieter Holger recently reported that:
“Companies are shoring up sustainability experience in the boardroom as they face mandatory climate-disclosure regulations. Among Fortune 500 companies, 25% of board appointees in 2022 had previous experience on sustainability committees, up from 14% in 2021… The findings for Fortune 500 companies underscore how boards are increasingly concerned about their lack of sustainability expertise, particularly around climate change and how to reach net- zero greenhouse-gas emissions”
Part of this trend is a response to a changing regulatory environment which is what some conservatives are trying to reverse, but another reason for enhanced board sustainability expertise is the recognition that a company’s environmental impact must now be factored into routine management decisions. That means that corporate governance structures must include expertise in sustainability management.
If there is a problem with ESG investing it is the absence of generally accepted sustainability metrics. It is not clear that the measures used to determine ESG performance are measuring that performance accurately. The proposed Security and Exchange Commission rule on carbon and climate risk disclosure is a first step in developing standard measures of the “E” element of ESG investing. Measuring environmental impacts will likely be easier than measuring social and governance impacts because physical science measurement is far simpler than social science measurement. Nevertheless, the effort to manage organizations by paying attention to ESG measures is an indication of careful and thoughtful operational management.
As sustainability measures improve, it will be easier to distinguish well-managed companies from those that are less well managed. Meanwhile, investors are putting money into ESG funds. Some of these investments reflect ideological concerns and some reflect an assessment of risk. The effort to politicize ESG investing by ideologues of the left or the right is unfortunate but unsurprising. Careful, prudent management should measure and seek to reduce all unnecessary organizational risk. These organizations tend to be successful over the long term. Management that is sloppy, expedient, and ignorant of the world around them, require luck to succeed. And eventually their luck runs out. Sometimes in small towns like East Palestine, Ohio.
Views and opinions expressed here are those of the authors, and do not necessarily reflect the official position of the Columbia Climate School, Earth Institute or Columbia University.
You really think Blackrock is the “paragon of Human Rights and Wokeness” – they are war profiteers who have gutted other countries for profit, stealing from the poor.