By Tamara O’Brien, TMIL’s roving reporter
With Democrat Professor Robert Eccles, Founder of the Sustainability Accounting Standards Board, Republican Dan Crowley, Partner in the Washington DC office of K&L Gates LLP, and Silvia Pavoni, Founder and Editor of the Financial Times Group’s Sustainable Views
“Yet each man kills the thing he loves,
By each let this be heard,
Some do it with a bitter look,
Some with a flattering word…”
Some do it by regulation;
Some with high ideals.
Some demand what’s good for the nation;
Some, that the planet heals.
Some urge we landfill all our cars
And buy electric wheels…
Apologies to Oscar Wilde for pinching the format of his Ballad of Reading Gaol, and mangling his rhyme scheme while I’m at it. But Wilde’s poignant paradoxes kept coming to mind as I ruminated on today’s discussion – which was all about the political/ideological divide over ESG, and where companies fit into it, and how we can break free of it to achieve the end goal.
And what came through was that, as with most of Life’s Big Questions, people are pretty much in agreement on the end goal: in this case, sustainable companies and a healthy planet. Where we divide, often bitterly, is on the means to achieve it, thereby making the desired outcome ever more remote.
It was extraordinary watching two past masters of the sustainability scene – I’m sure Bob and Dan won’t mind being described thus – argue incontrovertibly for what one might have assumed would be the other’s point of view. And Silvia, coming at the issue from a UK/European perspective, was equally happy to turn a few of their assumptions about Europe on their head too. With all three debating buddies deeply concerned and knowledgeable about their subject, a sparky conversation was guaranteed.
In her introduction, Claire spoke about how, in the particularly toxic political debate about ESG in the US and more recently in the UK and Europe too, the spotlight has turned on companies. They are, after all, the engines of our world. When they work well, they’re a conduit for progress, innovation, and the flourishing of individuals and society. So what role should they play in saving the world (partly from themselves, and at their own expense)? And who should govern what they do in this regard – their own shareholders? A wider group of stakeholders? Elected political parties? National jurisdictions? Global independent regulators?
The ‘right’ answers to these questions are shaped by a person’s core beliefs and justified by rational argument. But Republican Dan and Democrat Bob – who started working together when Dan responded to a piece Bob wrote ‘that wasn’t particularly friendly to Republicans’, and have been cheerfully promoting a bipartisan approach to ESG ever since – have proved that such beliefs are not necessarily set in concrete. In fact it seems to me that, rather splendidly, they’ve discussed the issues so long and hard they’ve met themselves coming back, and have absorbed the other’s point of view into their own spectrum of beliefs.
I refer readers to the following:
Dan on truth
In Washington we have this category called Alternate Facts and are still living in that environment, unfortunately. Let's set aside questions of objective facts, because I'm not sure what that means any more in Washington DC…
Bob on the ESG culture wars
The [far right congressional group] Freedom Caucus don't even know what ESG is – they just want to save America from the liberals. The far left doesn't like ESG because it's not about saving the world.
Dan on Republican dysfunction regarding policy issues in Washington
I have never seen a bigger disconnect between the political rhetoric and the reality of the policy underlying the discussion. I just look at it from the investor point of view – what’s material to them?
Bob on what the US parties really think
Dan and I have regular meetings on Capitol Hill with both Republicans and Democrats. Last week we asked the House Financial Services Committee, how important is ESG? This guy goes, ‘Well, maybe it's in the top ten for the Republicans. Maybe not in the top ten for the Democrats.’ When I speak to Democrats and liberals about climate change, the conversation is around financial institutions driving the energy transition, how companies should divest from oppression. When I speak to Republicans and conservatives, it’s much more about technology and innovation, more connected to the physical world.
Bob on why politics prevents progress
Dan and I agree on all the basic stuff: materiality, fiduciary duty – intellectual common ground between the parties is easy to find. Whether there's the political will to enact it, now that’s a different question. I do think though that the rhetoric/reality disconnect we’ve been talking about is running out of steam. I can imagine a resolution of some fundamental issues, whoever the next president is.
Dan on ESG as a proxy
Claire alluded to a proxy war and I think that's right. It's a proxy war in a global struggle between capitalism on the one hand and Marxism on the other. If freedom is zero and government control is 10 – figuring out where the relative jurisdictions are regarding ESG, I would submit that the US is probably at about 5, the UK at 6 and the EU at 7. And the reason I mention it is to underline the political sentiments in Europe that are being broadcast to the rest of the world, through action such as the CS3D [CSDDD, the EU Corporate Sustainability Due Diligence Directive], which would have profound consequences for how companies are run in the US, and in my view undermine the entire sustainability movement.
Silvia on what the US is getting wrong about Europe…
You’ve both alluded to ESG becoming a political issue in Europe. I don’t think that’s actually the case – but we are seeing pushback against climate policy and rule-making, and it’s tied to election cycles. The UK, Germany and the EU all have elections next year, which makes politicians sensitive to the cost of climate policy. In her State of the Union address, [President of the European Commission] Ursula von der Leyen emphasised European competitiveness, which made people think there may be a softening of proposed regulation around sustainability disclosure. In the UK, some green targets have already been watered down; France has called for a pause to green rule-making; while Germany is requesting smaller companies be excluded from the EU's sustainability disclosure requirements.
I agree that Europeans have a high tolerance for ESG legislation, while the UK is somewhere between the EU and the US. But the way rule-making is coming at companies is certainly concerning, especially for smaller companies in Europe. There’s the CSDDD that Dan mentioned, CBAM[1], and a bunch of other activity that regulators are working on.
… and on how ESG regulation affects companies
Take the auto industry. The big idea here is that nobody’s going to make combustion vehicles any more. So companies invest in creating electric vehicles. Everyone gets excited when the venture capital guys find a great high-tech solution. But these tend to be small groups of people, just pockets of investment. These things can actually scale, I would argue, if there is a consistent and well-thought-out policy that offers a carrot to facilitate investments across the board in the right technologies. So that's why we need policy.
But there has to be balance. If we focus solely on regulation, that's when things go wrong. I do agree that the regulatory burden on companies is enormous. And it makes reporting an exercise in compliance rather than giving useful information. Do we want companies to consider stakeholders other than shareholders, or not?
[1] Regular readers will be familiar with my awe at the acronym-generating power of ESG, and CBAM – the Corporate Border Adjustment Mechanism – was a new one to me. In my scribbled notes, I had this as ‘SEABUM?!’ – hardly daring hope that a piece of EU legislation on carbon leakage would have such a magnificent moniker. And so it proved. But I bet there’s a policy wonk somewhere for whom this little private joke is the triumph of a lifetime.
A way out
There is a light at the end of this labyrinthine tunnel, at least on environmental issues, and that light is called Putting a Price on Carbon. Whatever your perspective, this can universally be regarded as a good thing:
Dan: My Republican friends question whether GHG emissions are financially material. Well, putting a price on carbon makes them material. Having a bipartisan conversation about this is a far more effective use of time than whether ESG is good or bad.
Silvia: To me that’s the solution. Rather than getting evangelical about sustainable investing – or forcing people, through regulation, to disclose information they may find impossible to quantify – just change the business model, the economics of fossil fuels.
Bob: Yes, put a price on carbon and let the markets work! Dan and I met with the American Petroleum Institute, and even big bad Big Oil like API supports it.
And so we end on this hopeful, harmonious note. A tweak to the mechanism may be all that’s required to bring about the cooperation we so badly need. May that spirit prevail in all our conflicts.