Speaker 1: Welcome to Zero. I am Akshatrati.
Speaker 2: This week the ESG backlash.
Speaker 1: The world of ESG regulation and investing was already suffering
Speaker 1: a period of shaky confidence even before Donald Trump came
Speaker 1: back to the White House, and now Trump appears to
Speaker 1: be bringing in a new period of uncertainty about just
Speaker 1: how accountable companies will have to be to governments and
Speaker 1: investors when it comes to their environmental, social, and governance policies.
Speaker 1: So this week we're looking at the history of ESG
Speaker 1: and its future. Reporter Sagel Kishan, who has been watching
Speaker 1: these developments from New York, tells me how the US
Speaker 1: used to be a leader in ESG once upon a time,
Speaker 1: and we talk about why many companies today are still
Speaker 1: keeping their ESG plans in place but just not talking
Speaker 1: about it. But first I spoke with Copenhagen based reporter
Speaker 1: Francis Schotzkoff about how the ESG movement grew into its
Speaker 1: current form, why Europe is leading on it, and why
Speaker 1: major rollbacks appear imminent. Fran Welcome to the show.
Speaker 3: Thanks very much for inviting me.
Speaker 1: So ESG is at an inflection point both in Europe
Speaker 1: where you are based and around the world, most notably
Speaker 1: in the US. Can you take us a little bit
Speaker 1: back in time and tell us about the origins of ESG.
Speaker 3: Before we get to ESG, let's go further back in
Speaker 3: time too, after the Great Crash in the US.
Speaker 1: All the way back in nineteen ten twenty nine.
Speaker 3: Yep, that's right, all the way back then, there was
Speaker 3: very little regulation around how companies needed to report their earnings.
Speaker 3: That was triggered, as we know now from historians accounts
Speaker 3: of financial incongruities in many ways, and at the time,
Speaker 3: there were very few regulations around how companies had to
Speaker 3: report information, and as a consequence, there was a lot
Speaker 3: of yeah, shaky reporting, and that helped fuel the Great
Speaker 3: Depression and the Crash of nineteen twenty nine. After that
Speaker 3: happened in the US, in particular, financial reporting began to
Speaker 3: be standardized. It took, as we know, decades, and the
Speaker 3: ifrs and the GAP rules in the US are still
Speaker 3: changing to accommodate the changing economy.
Speaker 1: These gap rules there sort of got this weird acronym
Speaker 1: generally acceptable accounting practices. Is that right?
Speaker 3: Yeah? Man, It's a fabulously banal description of exactly what
Speaker 3: it is. They lay out how companies are supposed to
Speaker 3: talk about their finances in terms that are standardized, so
Speaker 3: that an investor can look across different companies and say, oh,
Speaker 3: you know, this match is that they're doing well here
Speaker 3: and not well there without having to worry that a
Speaker 3: company is somehow fudging the figures.
Speaker 1: And so these environmental social governance factors as we know
Speaker 1: them as ESG. Today they are known as non financial metrics,
Speaker 1: which is not just about how much money did you
Speaker 1: make in profits, how much revenue did you raise as
Speaker 1: a company, but going beyond that. So when did that
Speaker 1: come into the picture?
Speaker 3: Corporate sustainability or corporate social responsibility has been around for
Speaker 3: several decades. It grew out of many different kinds of
Speaker 3: bad news events, companies being caught in various polluting or
Speaker 3: mistreating their workers. And the perspective over time has changed,
Speaker 3: so it's a company not just beholden to its shareholders
Speaker 3: but also to society. That solidified in the EU around
Speaker 3: a piece of legislation called the Non Financial Reporting Directive,
Speaker 3: and that emerged actually after the financial crisis around twenty
Speaker 3: twelve twenty thirteen.
Speaker 1: So about a decade ago is when you really started
Speaker 1: doing rule making around these non financial metrics. Before that,
Speaker 1: it was just companies using those metrics as a voluntary
Speaker 1: disclosure to investors that, look, we care about the environment,
Speaker 1: here's what we're doing about it. We care about society,
Speaker 1: as we are doing about gender diversity in our workforce
Speaker 1: or something.
Speaker 3: Yeah. At first, companies reported on their own, and then
Speaker 3: the EU in the last decade after the financial crisis
Speaker 3: saw the need for companies to be mandated more or
Speaker 3: less to report on these kinds of factors, and they
Speaker 3: created what's called the Non Financial Reporting Directive. But even
Speaker 3: that failed to provide investors and the wider world with
Speaker 3: the kind of information people felt would tell them about
Speaker 3: what companies were doing. The information was not standardized. For example,
Speaker 3: for example, on human rights, a company might say, well,
Speaker 3: we adhere to UN policies around human rights, and that
Speaker 3: would conceivably be the end of it, and without explaining
Speaker 3: what they actually do, explaining where the risks are, explaining
Speaker 3: what efforts they make to actually identify possible human rights
Speaker 3: violations in their supply chains and in their operations.
Speaker 1: And so the EU starts making rules, they're still a
Speaker 1: bit vague. They're not quite helping investors to use non
Speaker 1: financial metrics to make decisions. But then comes what non
Speaker 1: governmental organizations called the Golden age of ESG rule making,
Speaker 1: starting in twenty nineteen. Why was it called the Golden age?
Speaker 3: That's right. In twenty nineteen, you begin with the creation
Speaker 3: of what's called the Taxonomy Regulation. The idea there on
Speaker 3: the EUS was to create a list of business activities
Speaker 3: business operations that are considered to be in the beginning
Speaker 3: environmentally sustainable. Eventually, they had hoped to create a taxonomy
Speaker 3: or list of activities that would also be socially sustainable.
Speaker 3: And the idea there was to help companies that to
Speaker 3: help investors to identify our right, is this business sustainable
Speaker 3: or not? Can we anticipate this would exist and help
Speaker 3: the world help people implant it. In twenty thirty forty
Speaker 3: years after that, they started creating a whole bunch of
Speaker 3: disclosure requirements around that and around the finance industry. The
Speaker 3: next step was called the Sustainable Finance Disclosure Regulation, which
Speaker 3: mandated that banks and insurers and other organizations report on
Speaker 3: some of these factors.
Speaker 1: You know, in one way even to get to the
Speaker 1: very metrics that we take for granted now, which is
Speaker 1: profits and revenues it took decades, whereas with ESG rules
Speaker 1: it's only really been ten years in the making. Why
Speaker 1: is it so complicated to get those rules to be
Speaker 1: good enough for investors to actually make decisions or good
Speaker 1: enough for companies to feel they are not spending far
Speaker 1: too much time reporting on them.
Speaker 3: The first reason both that companies give and banks and
Speaker 3: asset managers give is data, data, data, data. These are
Speaker 3: things that people haven't measured. They've never thought really about
Speaker 3: how much water they use beyond paying their water bill.
Speaker 3: They've never thought about how much carbon is encapsulated in
Speaker 3: the buildings they occupy. Although gender has been around for
Speaker 3: a longer period of time, they've not dug deep into that.
Speaker 3: And then you also have more controversial issues like labor
Speaker 3: union participation. The second thing after data is just the
Speaker 3: cost involved in getting all that together and the methodology
Speaker 3: and definitions. These are all things that are completely new.
Speaker 1: So currently, with all this rule making peered in the
Speaker 1: Golden era, what is actually being enforced in the EU
Speaker 1: and how are companies responding to it?
Speaker 3: So far, there's been more saber rattling than financial penalties.
Speaker 3: One of the reasons is most of these pieces of
Speaker 3: regulation are being phased in over time. The Sustainable Finest
Speaker 3: Disclosure Regulation, for example, that was implemented in March of
Speaker 3: twenty twenty one, and the first two three years were
Speaker 3: in many asset managers and bankers' minds pretty chaotic. That
Speaker 3: piece of legislation is still going is now under review
Speaker 3: and one of the expectations on the part of the
Speaker 3: regulators is that you comply as best you can. But
Speaker 3: they recognize that with these rules in flux, it's a
Speaker 3: little problematic to being people on the head for a
Speaker 3: rule that's changing or that's not completely understood.
Speaker 1: Beyond SFDR, there are other rules that have been created, right,
Speaker 1: come with new acronyms csrdcst PD. What are those and
Speaker 1: when do they come into force?
Speaker 3: That's right. The first set that I just referred to
Speaker 3: the Sustainable Finance package that was targeted at the finance industry.
Speaker 3: The idea was to leverage the finance industry to push
Speaker 3: the rest of the economy to begin the disclosure process.
Speaker 3: Next in line, then you have what's called the Corporate
Speaker 3: Sustainability Reporting Directive and get ready for the next acronym,
Speaker 3: the ESRs, the European Sustainability Reporting standards. These are much
Speaker 3: appreciated and much loathed set of standards on what companies,
Speaker 3: both financial and non financial have to report. The idea
Speaker 3: is you begin with the finance industry and you push
Speaker 3: the rest of the industry, and that's what CSRD does.
Speaker 3: It requires companies to upwards of fifty thousand when it
Speaker 3: first was conceived to report on all these various ESG factors.
Speaker 1: And then after that comes CS triple D, which is
Speaker 1: supposed to create punishments if the companies get it wrong.
Speaker 1: Is that right and what is CS trip D?
Speaker 3: That's right, and that stands for the Corporate Sustainability Due
Speaker 3: Diligence Directive. The idea there is that CSRD and even
Speaker 3: SFDR are really largely about disclosure. It's about telling people
Speaker 3: what you're doing and what you're not doing, telling people
Speaker 3: what the problem is, telling people how they're going to
Speaker 3: fix it. But disclosure doesn't necessarily mean companies are going
Speaker 3: to change their behavior. And that's where CS triple D
Speaker 3: comes in because the argument is that you kind of
Speaker 3: need a stick. We've seen bad things happen in the past,
Speaker 3: and the idea behind CS triple D is that that
Speaker 3: is the stick that prompts companies to actually take action.
Speaker 3: It includes a civiliability risk for the companies that are
Speaker 3: in scope, and it also mandates transition plans for the
Speaker 3: largest companies. Bad things have happened in the past. In fact,
Speaker 3: one of the events that triggered the creation of the
Speaker 3: Due Diligence Director was the twenty thirteen collapse of the
Speaker 3: Rana Plaza in Bangladesh, when hundreds of women died, hundreds
Speaker 3: of women who were so enclosed for the Western world,
Speaker 3: and the repercussions were felt throughout the garment industry, but
Speaker 3: hardly anybody was held responsible for that, and as a consequence,
Speaker 3: the European lawmakers, led by a Dutch parliament member named
Speaker 3: Laura Walters, designed this piece of legislation to hold companies
Speaker 3: responsible for actions in their supply chain. The argument is
Speaker 3: you can't push responsibility away by saying it was not
Speaker 3: my fault, I didn't know.
Speaker 1: And that's why there is also transition plans within the
Speaker 1: Due Diligence Director because it's a way of saying, look,
Speaker 1: you company have an imp on the world and that
Speaker 1: climate change can cause impacts for your company, and say
Speaker 1: physical asset risks, maybe your particular asset in the ocean
Speaker 1: is now more vulnerable to sea level rise as a
Speaker 1: result of climate change, and thus you need to have
Speaker 1: a plan. And so that is also the reason why
Speaker 1: the transition plans are part of the due Diligence Directive
Speaker 1: because they ask companies to both look at what they
Speaker 1: are doing to tackle climate change, but also what are
Speaker 1: they doing to manage the risks that will come from
Speaker 1: climate change, because if they are managing the risks, then
Speaker 1: the shareholders in those companies are more assured that this
Speaker 1: company has a longer future, right, that's correct.
Speaker 3: Yeah, The argument is that the larger companies need to
Speaker 3: be prayered for climate change. There are deniers out there,
Speaker 3: of course, we know that, but the vast majority of
Speaker 3: the large global companies acknowledge that the climate change exists
Speaker 3: and something needs to be done about it, and investors
Speaker 3: and other stakeholders want to know what these companies are doing.
Speaker 1: So now we've got a little bit of an understanding
Speaker 1: of how the rulemaking began, where there's been pushed back
Speaker 1: and back and forth with industry, which has to happen
Speaker 1: in any sort of rulemaking, But there has been pushback,
Speaker 1: and this pushback is starting to build up into this
Speaker 1: omnibus legislation, So by the time listeners hear this episode,
Speaker 1: the EU might have already put out the legislation and
Speaker 1: told the world what within those ESG rules it is
Speaker 1: going to either step back on or make it easier
Speaker 1: for companies. Right, what does it entail?
Speaker 3: There's been building over the last couple of years significant
Speaker 3: pushback against some of the regulations. The concern here is
Speaker 3: largely that the demands are too great, particularly for medium
Speaker 3: sized and smaller companies. They simply don't have the capacity
Speaker 3: at this moment in time, the resources, the knowledge to
Speaker 3: deliver the kind of information that's being required of them.
Speaker 3: Unlike in the US, there is general agreement that this
Speaker 3: kind of information is needed. So it's not a question
Speaker 3: of saying, let's pull the plug on all of it.
Speaker 3: It's more a question of pairing it down to the essentials.
Speaker 3: What are those essentials? Europe has one idea about how
Speaker 3: these rules need to be changed. There are indications that
Speaker 3: they are going to probably significantly pair back some of
Speaker 3: the reporting requirements. We do know that they do want
Speaker 3: to ease the burden on companies to provide all the
Speaker 3: data that these standards now require and there are more
Speaker 3: standards coming.
Speaker 1: And so another wrench that's been thrown in the ESG
Speaker 1: machine and the EU is what the US wants to do.
Speaker 1: You've done reporting that the Commerce Secretary, Howard Lutnik is
Speaker 1: interested in using US trade tools to try and influence
Speaker 1: ESG rulemaking that is domestic to the European Union. How
Speaker 1: exactly would that work?
Speaker 3: Yeah. One of the concerns on the U side is
Speaker 3: that the EU rules are engaging in what's called extra territoriality.
Speaker 3: That means they're governing the behavior of businesses that are
Speaker 3: not headquartered in the EU as they have operations outside
Speaker 3: of the EU. Now, the intention of the EU was
Speaker 3: to control the production of goods and services that end
Speaker 3: up in the EU, but some, as we know, the
Speaker 3: vast majority of those are going to be made somewhere
Speaker 3: else and imported into the BLOCK. The US feels that
Speaker 3: this is an overreach, a regulatory overreach on the EU's part.
Speaker 3: It also brings up the question of competitiveness and a
Speaker 3: level playing field. The US is concerned that its companies
Speaker 3: will be at a competitive disadvantage. This is somewhat ironic
Speaker 3: because one of the reasons that the EU has for
Speaker 3: rolling back some of its own ESG disclosures is because
Speaker 3: it's concerned that the regulations will in fact hurt its
Speaker 3: companies in the global market if the regulatory playing field
Speaker 3: isn't level.
Speaker 1: But isn't it hypocritical on the US side too, because
Speaker 1: the US does do rulemaking that has extra territorial impact
Speaker 1: all the time. Sanctions are a very good case in point. Right,
Speaker 1: they can go after Russia or Iran and leay sanctions
Speaker 1: on them and stop their companies from doing whatever the
Speaker 1: US wants. So how is it that the US can
Speaker 1: then turn around and tell the EU, well, your rules
Speaker 1: are having an extra territorial impact and so please shut them.
Speaker 3: Yeah, that's exactly right. That's one of the arguments here
Speaker 3: in the EU is that the that the US does
Speaker 3: in fact have several pieces of legislation money anti money
Speaker 3: laundering for example, among them, that have extra territorial reach.
Speaker 3: It's hard to say how that that battle over extra
Speaker 3: territoriality will.
Speaker 1: End after the break. New York based reporters see Kushion
Speaker 1: tells me about esg's American history and why with Trump
Speaker 1: back in office, companies are keeping quiet about their environmental
Speaker 1: and sustainability commitments. By the way, if you've been enjoying
Speaker 1: this episode, please take a moment to rate and review
Speaker 1: the show on Apple Podcasts and Spotify. It helps other
Speaker 1: listeners find the show. Sagel, Welcome to the show.
Speaker 4: Good to be here.
Speaker 1: So I just spoke with Fran about the history of
Speaker 1: ESG in Europe and we talked about how governments saw
Speaker 1: standardizing initially financial disclosures and then in the later half
Speaker 1: of the twentieth century applying the same lens to non
Speaker 1: financial disclosures. In the twenty first century, we've seen that
Speaker 1: Europe has become a leader in rulemaking on ESG. But
Speaker 1: within this broad idea of investing with purpose, the US
Speaker 1: has a longer history, right could you talk us through it?
Speaker 4: That's right. Actually, sort of investing with a purpose traces
Speaker 4: its routes back to religious investors who were shunning things
Speaker 4: like alcohol and gambling from their investments. That then later
Speaker 4: morphed into sort of this more corporate activism. It was
Speaker 4: at the time of anti Vietnam protests, the divestment movement
Speaker 4: in South Africa, which was under apartheids. So this pushed
Speaker 4: a bunch of investors mainly actually in the Boston area
Speaker 4: to use their shoholder clout to push companies to start
Speaker 4: doing good.
Speaker 1: And that had some success, right because we know that
Speaker 1: apartheid era investors did have an impact on the government there.
Speaker 1: And so how did it build up into what we
Speaker 1: now call ESG today. So we saw in.
Speaker 4: Two thousand and four, two thousand and five officials at
Speaker 4: the UN and they coined this label ESG. They wanted
Speaker 4: to actually pivot away from do gooding investing in moral investing,
Speaker 4: and they want to basically use the language of Wall Street,
Speaker 4: which is risks and opportunities. Socially responsible investing actually kind
Speaker 4: of was criticized by mainstream finance for being too sort
Speaker 4: of granola and crunchy, so to speak. So talking about
Speaker 4: risks and opportunities was squarely in the language of bankers
Speaker 4: and traders and other investors. So yeah, the whole idea
Speaker 4: was for investors and finances to when they're doing they're
Speaker 4: making decisions on whether to lend or finance or invest,
Speaker 4: they would also take into account environmental and social issues
Speaker 4: into that decision making.
Speaker 1: And so now within this big broad tent of ESG,
Speaker 1: factors which are even today ill defined in the aggregate.
Speaker 1: You know, Europe is trying to make some progress, but
Speaker 1: in the US, where there's no rule making really happening,
Speaker 1: it's whatever you kind of want to make of it.
Speaker 1: So if you just take the e part, which is
Speaker 1: probably more clearly defined than our where you have clear
Speaker 1: goals set on emissions, on reaching climate targets, could you
Speaker 1: just talk us through what the backlash in the US
Speaker 1: has been, which began well before trump second term began.
Speaker 4: Yeah, that's right. You could trace its early routes to
Speaker 4: twenty twenty one, and it was around the time when
Speaker 4: Texas passed through a state bill basically restricting business with
Speaker 4: companies that it claimed to be shunning fossil fuels. It passed,
Speaker 4: and yeah, it was pretty low key, under the radar.
Speaker 4: But towards the end of twenty twenty one, Ronda Santis,
Speaker 4: then Florida governor who was eyeing a run for president,
Speaker 4: he took on this attack on ESG and started attacking
Speaker 4: Black Rock, whose CEO I think has been a big
Speaker 4: champion of ESG. Then twenty twenty two, Elon Musk, Peter Thiel,
Speaker 4: and even former Vice President Mike Prince all piled in
Speaker 4: and started characterizing ESG as well capitalism and something created
Speaker 4: by the radical left that would be a threat to
Speaker 4: the American way of doing business.
Speaker 1: So if we were to take a Wall Street perspective,
Speaker 1: is there any way to know whether ESG factors, if
Speaker 1: they're looked at from the lens of risk and opportunity,
Speaker 1: if those factors have had any impact on company profits,
Speaker 1: And let's take it one by one.
Speaker 2: ES and G.
Speaker 4: Lately we've seen ESU risks and that's coming in the
Speaker 4: form of insurance. We've seen big insurance companies leave states
Speaker 4: like California, Yorkshire obviously prone to to extreme weather events
Speaker 4: like wildfires, so that's been been a big risk on
Speaker 4: the s. We've seen, perhatually more concrete examples of risk
Speaker 4: playing out in portfolios. We've seen companies like Fox having
Speaker 4: to dole out millions of dollars in sexual harassment claims
Speaker 4: or settlements. Tesla had to pay a large party to
Speaker 4: a former contractor who accused the company of racism. And
Speaker 4: just two years ago we saw the auto workers strikes
Speaker 4: that really impacted the like sort of like Forward and
Speaker 4: General Motors, and they had to put millions of dollars aside.
Speaker 4: Their share price is tanked and just to explain, like
Speaker 4: the worker strikes at the s in issue, it's about
Speaker 4: worker rights, labor issues and things like that.
Speaker 1: And the G which is sort of the forgotten factor
Speaker 1: in ESG, Where does that play a role.
Speaker 4: Yeah, I mean G it's I mean it's kind of
Speaker 4: mainstream finance. It's more of a process. It's not an
Speaker 4: investable idea like investing in E issues, like investing in
Speaker 4: a solar company for instance. But for the G issues,
Speaker 4: you know, boardroom diversity comes into that. And you know,
Speaker 4: after the George Floyd protests here in the US in
Speaker 4: twenty twenty, we've seen a lot of companies ramp up
Speaker 4: their board diversity initiatives which recently haven't actually been unwound. Yeah,
Speaker 4: it's mainly S and E, which is where you see
Speaker 4: the sort of the impacts on the bottom line.
Speaker 1: But if we take the Wall Street lens on ESG,
Speaker 1: which is these do provide certain risks, and they provide
Speaker 1: a signal to investors looking at the portfolio that they
Speaker 1: have in their company. They seem to say, there are
Speaker 1: some fundamental risks that we do need to account for
Speaker 1: as we invest. And so our ESG minded investors who
Speaker 1: understand these risks, who are sitting in the US welcoming
Speaker 1: of the Use approach which is actually doing the rulemaking,
Speaker 1: even if it is not the US that is taking
Speaker 1: the lead.
Speaker 4: I mean, it is really a mixed bag. I mean,
Speaker 4: obviously you'll see sustainable investors who welcome this and want
Speaker 4: to bring these rules on board, and to an extent,
Speaker 4: they're doing a lot of this voluntarily anyway. But we've
Speaker 4: got the likes of big groups, lobbyist groups who are
Speaker 4: pushing back on these rules and saying that it's going
Speaker 4: to be costly, weigh on small businesses, especially at a
Speaker 4: time where small businesses after the pandemic have struggled, and
Speaker 4: now that we have a president who's for deregulation, there's
Speaker 4: even more stronger pushback.
Speaker 1: It's only been a month since Trump has been in power.
Speaker 1: You know, there are four more years of this. How
Speaker 1: do you expect this to play out for ESG over
Speaker 1: the next four years?
Speaker 4: I mean, look, the pressure is going to continue. I
Speaker 4: mean we've seen even before Trump was elected, Wall Street
Speaker 4: pretty much go silent on climate change, talking about climate risks,
Speaker 4: leaving net zero groups and really shy away. They faced
Speaker 4: investigations some companies have been sued or faced legal action,
Speaker 4: and so a lot of companies are just like, hey,
Speaker 4: this has just been too much for us, more than
Speaker 4: what we bargained for. But having said that, they're not
Speaker 4: going completely silent because they still have Blue state clients,
Speaker 4: pension plans in California and New York, they have European
Speaker 4: clients that this still in the case of two and
Speaker 4: still very sort of cognizant of climate change and impacts
Speaker 4: on portfolios.
Speaker 1: And especially on the E factors. I mean, we are
Speaker 1: going to see more extreme weather events and those are
Speaker 1: risks that companies will face. Are they just quietly trying
Speaker 1: to deal with those risks?
Speaker 4: Now? That's right. Quietly it's a good word. It's e
Speaker 4: flom called green hushing, where people are still doing the
Speaker 4: work but just not being so vocal about it.
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