This month a striking free-speech fight has erupted in Texas. No, this is not yet another social media salvo from Elon Musk or a battle over book bans.
Instead, the American Sustainable Business Council is suing the Texas government over its 2021 and 2022 decisions to blacklist companies that uphold environmental, social and governance strategies.
Rightwing Texas politicians initially justified these moves as a bid to prevent ESG activists from imposing their views about climate change, say, on everyone else. However, the plaintiffs argue it is actually the anti-ESG movement that is breaking free-speech rules, by implicitly forcing finance to support fossil fuels. The suit is thus a form of legal ju-jitsu — or a bid to redefine the idea of “freedom”.
Whether it will work is unclear. But investors should take note for at least two reasons. The first, obvious, point is that it symbolises how the zeitgeist around ESG has changed.
Five years ago, the term became wildly fashionable amid a wider rethink of the role of business in society. In August 2019, America’s Business Roundtable explicitly called for a move away from the shareholder-first mantra championed by the economist Milton Friedman and the adoption instead of a “stakeholder” framework that embraced societal interests and values.
Since then, terms such as ESG or DEI (diversity, equity and inclusion) have become favoured whipping boys for the political right, which equates them with leftwing “woke capitalism”. And, unsurprisingly, many American business and finance leaders are eschewing those words, for fear of becoming political targets. Hence that Texas lawsuit.
However, the second reason why this case is so symbolic is that it also shows the anti-ESG crusade is not as straightforward as it might seem. At first glance, you might view it as a bid to simply turn back the clock to that late 20th-century era when Friedman’s vision ruled supreme.
And some figures do explicitly want this: last month 14 Republican state treasurers asked the BRT to “abandon the fatally flawed” stakeholderism mantra and “return to the purpose of maximising value [for] shareholders”.
But what is most notable about this letter is how rarely today we hear such explicit calls for a return to the Friedmanite framework. And the BRT currently shows no sign of bowing to these demands. Instead, it issued a new statement which stressed that companies “can and must” pursue both profits and purpose and “invest in their workers, suppliers and communities” — their stakeholders, in other words.
Why? One reason is that there is widespread recognition in the BRT that an energy transition is inevitable, never mind partisan politics. Another is that it is not just leftwing voices today who want more emphasis on stakeholders and societal interests. Far from it.
If you parse the rightwing attacks on “woke capitalism”, it becomes clear that these are less focused on demands for companies to ignore all social values and more around a demand for a return to traditional, non-progressive, ideas. In place of racial diversity, LGTBQ rights and clean energy, anti-ESG crusaders want more focus on family values and fossil fuels.
Even amid these attacks on ESG, there is a new emphasis on industrial policy, protectionism and populist economics — from both left and right. Just look at the White House move to block Nippon Steel’s attempted takeover of US Steel. Or listen to the recent rhetoric from JD Vance, the Republican vice-presidential candidate, calling on companies to support local communities, workers and national security interests. What Vance is espousing is another variant of “stakeholderism”, but not as ESG activists know it.
This taps into two other shifts. First, societal attitudes towards business are changing. When Friedman developed his shareholder-first theories, the public generally assumed that it was the role of government — not business — to solve societal challenges, and did not expect companies to be very transparent.
Today, however, only 40 per cent of Americans trust government, while 53 per cent trust business, according to Edelman polls, and digital technology enables once unimaginable scrutiny of companies. As a result, more than two-thirds of consumers think corporate brands should take a position on social issues, and 75 per cent would leave a company if they disagreed with its political slant. Stakeholderism is becoming a cultural norm.
Second, corporate leaders, for their part, increasingly realise they cannot ignore the social and political context in which they operate. Friedman’s shareholder-first mantra went hand in hand with an assumption that the issues that really mattered for companies were those recorded on their balance sheets.
However, in the past decade the biggest business shocks have emerged from other places: climate change, pandemics, gender rights, political strife and war. And a survey by EY this week shows that most business leaders expect to see more — not less — political risk in the future, and only 30 per cent think they understand this. In this environment, ignoring stakeholders looks dangerously risky.
The key point, then, is that irrespective of whether the ESG tag is under attack, stakeholderism is flourishing — albeit in new ways, and amid a battle for social values and priorities. Yes, that might cause the ghost of Friedman to spin in his grave. Everyone else, however, should watch that Texas lawsuit — not to mention the upcoming US election
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