Even prior to the most recent U.S. Supreme Court term, the crescendo of voices in opposition to progressive policies were becoming a forceful, if not to say cohesive, polyglot. More ominously, what began as mere sound became fury and then metastasized into action, then into policy and finally into law.

We see a confluence of two main factors at work, each tugging in opposite directions: On the one hand, boardrooms reel from increasing environmental, social and governance (ESG) regulations, while at the same time, coordinated attacks from portions of the political class have transformed anti-ESG sentiment into legislation and policy—and in some instances, litigation.

What is at stake is how we address environmental factors like climate change and water and air pollution, social factors like diversity, equity and inclusion, and governance factors like hiring and lobbying in boardrooms and as a society.

Interestingly, these competing movements and their progressions seem to feed off of each other. As fluency in the language of ESG migrated into the business mainstream, so too did the brazenness of the official pushback. This is no accident. Right-leaning pols seem not content to simply neuter ESG but to demolish it altogether and to display its severed head in the public square. Yet the shrillest voices on either side of the political spectrum rarely have staying power, and there are already signs that the most extreme of those attacks on ESG are wearing thin in the business world. See https://prospect.org/politics/2023-07-05-will-desantis-culture-war-backfire/. Having said as much, the impact on official policy continues.

All of this poses a dilemma for businesses trying to adapt to what comes next. What tools will help in navigating the terrain ahead? Is the movement toward good corporate citizenry stalled?

The point of this article is not to pick sides in the battle to determine the fate of the ESG movement but to pose the question as to how it may play out. I see five primary reasons—each touching upon a different aspect of ESG—why companies should assume that the ESG movement is here to stay and will continue to gain currency in the corporate community and among stakeholders who hold sway over it.

The Universal Benefits of Bias Elimination

In September 2020, Citigroup published a study called “The Cost of Racism,” which concluded that the U.S. lost over $16 trillion in GDP as a result of systemic bias against African Americans in just four specific areas: entrepreneurial capital, wage disparities, housing discrimination and higher education funding. The details are stunning:

• $13 trillion lost due to lack of access to entrepreneurial capital
• $2.7 trillion lost due to wage disparities
• $218 billion lost due to housing discrimination
• $90 billion lost due to shortages in higher education funding.

It should be noted that the GDP for the entire United States in the year the study was completed was $19 trillion. To be sure, closing those gaps would have benefitted the individuals, families and businesses impacted, but more importantly, such efforts would inure to the benefit of the whole.

The economies of the United States, and indeed the world, were robbed of a wealth of talent, productivity and entrepreneurial genius because of racial bias. This not only illustrates the universal, race agnostic rationale for ending systemic discrimination but also firmly plants what, on its face, may appear to be “social engineering, into the firmament of sound business practices.”

It should be noted that the Citigroup study focused only on bias in the Black community and even then in only four specific areas of concern. If we broaden the lens to include other communities of color or marginalized groups, as well as additional touchpoints (health care, primary education, food deserts, redlining, discriminatory planning, etc.) the results would surely have been even more stark.

A plethora of data exists that tethers the removal of barriers to an increase in the bottom line. See https://www.mckinsey.com/capabilities/people-and-organizational-performance/our-insights/why-diversity-matters. What is new is that industries historically underrepresented by people of color are engaging in meaningful self-examination, delving into these practices and seeking solutions.

The Stubbornness of Facts and the Prevalence of Recurring Events

The necessity for one particular tenet of ESG regulation is becoming more self-evident every day. No one can argue credibly that the environment is not in a crisis. As I write these words, the world is experiencing its hottest average temperature day in the history of the planet. An exceptionally aggressive wildfire season in Canada recently had U.S. cities as far afield as Minneapolis and Philadelphia trading spots on top of the “world’s worst air quality” list.

Californians have become accustomed to rhythmic cycles of apocalyptic phenomena ranging from floods to drought to fire. Having personally lost my home to Hurricane Katrina, no one need convince me of the strength and frequency of major storms. Deforestation in the Amazon, flooding in Pakistan, the disappearing glacial landscape and coral bleaching all illustrate the global nature of this issue. There is universal consensus that climate change is not only real but that its consequences carry immeasurable geopolitical and commercial consequences globally.

Evidence of the business world’s recognition of this fact surfaced during the November 2022 global climate summit in Sharm El Sheikh. See https://www.bbc.com/news/science-environment-63781303. For the first time, the summit included a historic commitment by richer nations to give money to developing nations to help them recover from the damage and economic losses wreaked by ongoing climate change impacts. This commitment is rooted in corporate and governmental self-interest and incentives for all parties concerned—wealthy nations, emerging nations and corporate actors—to take seriously these challenges.

The other end of the carrot/stick continuum is illustrated by the 2022 raid by the German equivalent of the FBI on an investment bank. The company allegedly engaged in “greenwashing” by fraudulently enticing investors to buy securities that were falsely represented as environmentally compliant.

As illustrated earlier, these anecdotes represent a recognition by the corporate community, tethered in this instance to governmental policy makers, of the need to view environmental impact in both economic as well as national security terms.

In the excellent book “The Walmart Effect,” the author describes how the company turned its previously abysmal environmental reputation around by embracing its critics. One anecdote tells of how one small change to the packaging for deodorant canisters benefited its customers, its competitors, the environment and its own bottom line. Green jobs, once considered radical, are now touted as the wave of the future, and forward-thinking fossil fuel companies like Exxon Mobil, Shell and others are investing in carbon capture and EV technology. It may be too soon to conclude that green is the new black, but things are certainly headed in that direction.

The Weight of Demographic Inevitability Combined With Increased Minority Buying Power

The U.S. census report has, for the past three decades, revealed an inescapable trend that finally reached a critical point in 2020. The U.S. non-Hispanic white population, which has been slowing in growth in the last 30 years, declined to below 60% for the first time ever, while population growth occurred among minority groups. The data showed the white only population falling to roughly 58%, a decline from the 64% counted in 2010. To be clear, a significant reason for the dramatic drop in white-only census population is related to the respondents being able to check more than one box to identify their racial makeup for the first time. See https://www.npr.org/2021/08/22/1029609786/2020-census-data-results-white-population-shrinking-decline-non-hispanic-race.

Nonetheless, this change is real, significant and virtually inevitable. Moreover, the change isn’t just about demographics. As the population has become more diverse, so too have minority communities gained in buying power and shown a greater willingness to exercise their strength. A new report found the following:

“Based on data provided by the U.S. Census Bureau, the U.S. Bureau of Economic Analysis and other sources, the Selig Center estimates the buying power for African American, Asian American and Native American consumers, which has exploded over the past 30 years, up from $458 billion in 1990 to $3 trillion in 2020. In addition to increasing sheer size, their combined share of the nation’s total buying power increased from 10.6% in 1990 to 17.2% in 2020. Hispanic buying power also has grown substantially over the last 30 years, from $213 billion in 1990 to $1.9 trillion in 2020. Hispanic buying power accounted for 11.1% of U.S. buying power in 2020, up from only 5% in 1990.”

Interestingly, the increase is tied to the same factors referenced earlier in the Citigroup study. The report found that:

“’The diversification of the U.S. consumer market has been driven by many factors, including population growth, favorable demographics, entrepreneurial activity and rising levels of educational attainment,’ Humphreys said.

“A major factor underpinning the growth of the nation’s minority markets is that African Americans, Asians and Hispanics continue to become more highly educated, which allows proportionally more Blacks, Asians and Hispanics to enter occupations with higher average salaries.”

The takeaway is that even as educational access for persons of color becomes more constricted and some governmental efforts punish a meaningful focus on DEI, the marketplace itself will continue to mirror the population as a whole. This will place a premium on outreach to those increasingly affluent diverse consumers as well as on internal talent needed to connect with them. Companies ignore these factors at their own competitive risk.

The Erosion of the Corporate Accountability Buffer and the Embrace of Policy Nimbleness

I attended a lecture and book signing for Microsoft president and former general counsel Brad Smith. The topic turned to the different expectations brought to bear by the latest generation to enter the marketplace. He described how his annual presentation to the army of Microsoft summer interns, which must number in the thousands, was no longer a routine nor unilateral exercise. This most recent cohort, he shared, came armed with a list of demands. Brad was incredulous. “I thought to myself … you all do know you are only here until August, right?” His comment was, of course, in jest. Microsoft has a strong record of embracing emerging talent and Brad Smith is a pioneer in inclusiveness. But his point was well taken. Gone are the days when the seemingly least influential stakeholders—both internal (employees) and eternal (consumers)—are voiceless.

I recall attending my first annual meeting as associate general counsel at Walmart. Having previously worked at a publicly traded utility company, suffice it to say, my prior annual meetings were tame in comparison. Starting promptly at 7:30 a.m. at Bud Walton Arena, the meeting was part pep rally, part political convention and part Grammy Awards show.

As I recall, Sinbad was the host that first year. I recall performances by J-Lo, Jordin Sparks, Miley Cyrus, Joss Stone, Garth Brooks and Kool & The Gang. Michael Jordan made a cameo. But what I recall most from that first meeting was the business session when individuals had the chance to speak for or against certain resolutions up for vote. Interspersed between buttoned up professionals, was the occasional gadfly who took the mic and complained that Walmart was an ultra-conservative evil empire, followed by someone else voicing their opinion that the company was an ultra-liberal evil empire.

Board Chairman Rob Walton thanked each politely. After all resolutions were read and speakers spoke, the vote commenced and the results were announced.

That was in 2007. The iPhone had not yet been invented, much less Twitter or Instagram. Today, one of those individuals might well post a screed of themselves from inside the venue or livestream their presentation. Instead of the 1,600 attendees inside Bud Walton Arena, the message might reach 160 million with zero filter. It might then be amplified by any number of actors with dubious intentions and even more dubious facts.

So many instances of momentary lapses in judgment, slips of the tongue or even intentionally malign acts result in the need for companies to act, speak or react promptly and fearlessly in support of one cause or another. The terrain is perilous and cuts many ways, as so many incidents show. Consider the arrest of two black men in a Philadelphia Starbucks that resulted in the entire company shutting all stores for a full day of bias training, or the recent Bud Light boycott connected to a transgender influencer that has resulted in an 18% drop in stock price.

Whether inadvertent or intentional, almost every action in this arena can carry with it consequences. This means a thoughtful, strategic approach to the full constellation of ESG related issues, embedded at the board and/or C-suite, is a must. An ESG strategic plan is needed that encompasses the organization’s guiding principles, which can then be relied upon when and if the accountability buffer is pierced.

The Democratization of Empathy

We truly live in an era where a moment can metastasize into a movement literally within seconds. George Floyd was certainly not the first Black person to be murdered by law enforcement in such grisly fashion. I believe the fact that the murderer acted with such callous insouciance and in full view of both real and virtual witnesses helped catapult the issue to global consciousness.

However, I believe the most compelling reason the issue resonated with so many of the nonminority population in the United States and abroad is because of the pandemic. The fact that the majority of the population was at home and more likely engaged in news consumption was one thing. But more importantly, the pandemic made the entire world experience the feeling that comprises the daily background noise of the lives of every person of color: the fear that even the most benign acts (leaving the house, going to the grocery story) could prove to be lethal. This, to my mind, established a democratization of empathy that created universal understanding that we are all in this together.

While time holds the key in revealing which side of the movement will succeed, businesses don’t have the luxury of time to delay addressing ESG and what it means now, and in the future, for their economics, boardrooms, workforces and consumers. I see these five reasons as some of the most pressing for why ESG will continue to matter to the stakeholders that ultimately determine the success or failure of a business.

 

Reprinted with permission from The Legal Intelligencer, © ALM Media Properties LLC. All rights reserved.