Breaking Common Ground: The Fallacy of ESG as a Polarizing Issue
It is widely acknowledged that, for most Americans, there exists a meaningful divide between politics and policy. While politics revolves around identity, ideology, and tribal dynamics, policy remains the driving force behind the mind-numbingly dull machinations of the state. Examples abound. During the painful passage of the Affordable Care Act, pollsters provided ample evidence of the public's disdain for the law and their embrace of its provisions.1 From the other side of the aisle, conservatives were frustrated by the unpopularity of the 2017 Tax Cut and Jobs Act when provisions such as the expansion of the Child Tax Credit were polling well across ideological lines. Unfortunately, complex issues often fall prey to a dichotomy between intellectual knowledge and emotional sentiment.
According to new research, environmental, social, and governance (ESG) data and related investment strategies are just one more victim of this paradox. PennState University and the consulting firm Rokk Solutions recently surveyed 1,261 registered voters to understand their perception of ESG. Unsurprisingly, once we move beyond political bumper stickers, it turns out we agree far more than we disagree about the mundane practicality of ESG. The authors noted that they "were overwhelmed by the large bipartisan support for business engagement in ESG, especially among voters under the age of 45."2
Majorities from Either Party Believe Corporate Environmental Action is Relevant to Financial Success
Although the survey found ideological differences regarding corporate environmental action's relevance to financial futures (80% of Democrats vs. 53% of Republicans agreeing), the partisan divide erodes when the questions become more specific. When asked about ecosystem restoration or land and water conservation's relevance to their financial futures, 57% and 68% of Republicans responded affirmatively (compared to 77% and 81% for Democrats).2
Is it really all that surprising that Americans of varying political stripes intuitively understand that financial outcomes and ESG performance are not mutually exclusive?3 For skeptics, a simple, informal study can be revealing. Ask a client, colleague, or friend if they prefer the person managing their money to consider or ignore:
If a real estate holding company owns properties in areas disproportionately at risk of extreme weather?
The strength of a company’s data security polices?
It's not difficult to understand that flood risk and data security are material, commonsense considerations when making investment decisions.4,5 In fact, don't we all consider flood risk before buying a home? If you have, then welcome to the ESG community.
If this resonates, consider the real-world implications for a typical financial advisor. If a hypothetical client base of 100 individuals is half Democrat and half Republican, 67 of those clients would consider corporate environmental action relevant to their finances. Even if the hypothetical client base is 80% Republican, 58 of the 100 would still consider corporate environmental action relevant.
Most Clients are Likely to See the Value in ESG Data
Within 100 hypothetical investors, a substantial majority would consider environmental corporate action to be important.
The reality is that when we put politics aside, we tend to agree far more than we disagree. It's not to say that politicians have not been effective in polarizing ESG. They have, and consequently, far more financial professionals avoid the topic of ESG for fear of getting entwined in a political argument. Understandable, but the Penn State/Rokk survey reveals an underlying pragmatism among investors.
It's a personal decision on how much anyone in finance chooses to lean into the ESG moniker, but even for the wary, it's safe to assume that investors want to maximize return, limit risk, breathe clean air, and drink clean water. Just as opponents of various laws are disarmed by asking about their specific provisions, investors may also find common ground in the minutia. It's just a matter of asking the right questions.
1 Dalen, James E., Keith Waterbrook, and Joseph S Alpert. 2015. “Why Do So Many Americans Oppose the Affordable Care Act?” National Library of Medicine, Aug, 128 (8): 807-10. DOI: 10.1016/j.amjmed.2015.01.032
2 Davidson, Gregor. 2021. “Greenwashing Tops Investors’ Concerns Around ESG Products, New Research Finds.” Quilter, May 24. https://media.quilter.com/search/greenwashing-tops-investors-concerns-around-esg-products-new-research-finds/
3 Whelan, T., Atz, U., Van Holt, T., Clark, C. 2021. “Uncovering the Relationship by Aggregating Evidence from 1,000 Plus Studies Published between 2015-2020.” NYU | Stern, February 10. https://www.stern.nyu.edu/experience-stern/about/departments-centers-initiatives/centers-of-research/center-sustainable-business/research/research-initiatives/esg-and-financial-performance
4 Redebusch, Glenn D. 2021. “Climate Change Is a Source of Financial Risk.” Research from the Federal Reserve Bank of San Francisco, February 8. https://www.frbsf.org/wp-content/uploads/sites/4/el2021-03.pdf
5 Huang, Keman, Xiaoqing Wang, William Wei, and Stuart Madnick. 2023. “The Devastating Business Impacts of a Cyber Breach.” Harvard Business Review, May 4. https://hbr.org/2023/05/the-devastating-business-impacts-of-a-cyber-breach
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