ESG Unpacked: It’s A Political Firecracker.

The acronym ESG (“environmental, social, and governance”) has become a shorthand term for social responsibility and a “nebulous concept with no clear limits,” say the writers of a post on the Harvard Law School Forum on Corporate Governance. It’s become a headache for executives and investors, and number of them at a recent World Economic Forum summit in Davos expressed frustration over “intensifying drama around ESG.”

“Like it or not, however,” say the writers (attorneys with Wachtell Lipton), “they are going to have to contend with ESG controversies and disclosure obligations for the foreseeable future, while staying focused on their strategic priorities.”

The writers note the current debate centers on the question of how much financial downside is acceptable in the name of pursuing environmentally friendly operations. (That’s a debate that gets complicated by the fact some major investment funds dispute the premise that favoring environmentally friendly investments actually does constitute a financial sacrifice. A lawsuit targeting directors at Shell Oil, brought by a UK environmental group and backed by several investment funds that have combined assets of $550 billion, maintains the opposite is true, and that contention is the major premise of the lawsuit.)

In any case the battle has been joined, notably in the U.S., as some major investment funds that are steering clear of fossil-fuel companies have been sued by the state of Texas, and ESG requirements have been attacked by attorneys general and other officials in a number of red states. BlackRock, Inc., the Harvard forum post notes, has been a prime target, and billions in investment funds have been withdrawn. The Arizona state treasurer accuses BlackRock of moving “from a traditional asset manager to a political action committee [and] away from its fiduciary duty in general as an asset manager,” while a report from Republican senators on the banking committee maintains the so-called “Big Three” asset managers (BlackRock, State Street, and Vanguard) are using investor money to promote “political movements unmoored from financial performance.”

The ripest area for controversy in the ESG formulation, according to the writers, is the “S,” for Social. That’s a broad category ranging from diversity, employee safety and labor exploitation in supply chains, to issues like abortion and gun rights. It was Elon Musk, they note, who recently tweeted that the S in ESG stands for “Satanic.”

ESG disclosures have become a significant obligation worldwide with the EU’s adoption of the Corporate Sustainability Reporting Directive (CSRD). It drastically increases the range of companies affected by ESG-related disclosure requirements, in part by including a “value chain” category, and many U.S. companies will qualify.  -Today’s General Counsel/DR