Over the last year, ESG has become a political football as state actors have passed legislation to prevent state pensions and other institutions from weighing ESG factors in investment decisions.  These prohibitions have extended to proxy issues cited by proxy advisors to state and local pensions and other funds. 

These efforts, however, have done little to stem the importance of ESG to shareholders, regulators, and other significant stakeholders.  The political forces favoring ESG continue to demand that investment decisions be made with full consideration of ESG factors.  Shareholders are demanding robust disclosures of ESG factors and risks faced by public companies.  This is not to say that internal disagreements in companies exist when it comes to ESG risks, disclosure and the importance of such considerations to the overall corporate mission.  No matter what – some companies prioritize ESG and some do not.  It is a plain fact of life in the new corporate governance landscape.

The difficult question remains – how should a company balance ESG issues when there may be internal and external disagreements over the importance of addressing ESG risks?  Depending on the specific industry in which a company operates, in the end, decisions have to be made carefully within an ethical and risk-based decision-making framework.

Like any other significant issue facing a company’s board and management, you must start with identifying the risks and potential benefits/costs tied to these risks.  In other words, if addressing ESG may increase overall costs, this factor has to be balanced against overall gains in investor funds, reputational benefits and potentially increased or sustained sales performance.  On the other hand, embracing ESG factors may increase costs if states or other actors respond negatively to such an initiative.  As always, risks and rewards have to be balanced like any other business decision.

This calculus, however, has to incorporate the role and weight of political opponents to ESG.  How does a company manage this risk? Companies often face political risks as one of many important stakeholders.  Again, such risks have to be weighed against potential downside results and upside benefits.  A company can mitigate such risks through its political/lobbying operations and may initiate a specific strategy depending on its overall ESG plan.

Corporate boards and senior executives balance stakeholder demands and conduct cost benefit analysis to maximize sustainable corporate performance.  ESG is just a new factor that has to be balanced ion the overall mix.  Like any other risk, corporate board members and senior executives, as fiduciaries, have an obligation under prevailing corporate law to identify, measure and mitigate risks.

Companies face competing demands in every aspect of their operations.  There is nothing new in ESG except the substance of the issues and the priority that companies assign to the specific ESG factors.  While there are political risks in certain states, companies have to manage such risks through mitigation strategies.  This is something every business knows how to do, and there is no special measure that has to be conducted when it comes to ESG.

Institutional investors are clamoring for more ESG focus from companies.  Some proxy advisors are focused on responding to potential proxy issues under the ESG umbrella.  Companies have to define their ESG strategy, adopt a plan, and respond to competing demands from stakeholders.  In some cases, a company may adopt a public position; in other situations, a company may stay silent until absolutely necessary to take a public position.  There is no one right answer – so much depends on the specific circumstances.