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- [00:00]
Kurt Nickish
You're listening to Is Business Broken, a podcast from the Merotra Institute for Business, Markets and Society at Boston University Questrom School of Business. I'm Kurt Nickish. Several episodes ago I told you we were doing a three part series on ESG, or environmental Social Governance. We looked at the history, we debated the practice of it, and we talked to experts about the reality on the ground. Now we're adding a fourth ESG conversation that I believe is really important too, about the future, where this is all going, how will today's political battles play out, how might emerging technology affect the field, and what is the evolving role of the shareholder in all of this? Joining me today to answer those questions and more are Bob Echols, Visiting professor of Management Practice at said business school at the University of Oxford, and Madison Condon, Associate professor at Boston University School of Law. Great to have both of you here. Thanks for doing this.
- [01:11]
Bob Echols
Good to be here.
- [01:12]
Madison Condon
Thanks for having us.
- [01:13]
Kurt Nickish
So before we get into the question of how ESG is evolving and where it's going, I want to ask why is ESG such a hot topic right now? Why is ESG under attack so much right now?
- [01:27]
Madison Condon
I think it's been under attack for a few years. I think the peak was maybe even last year or so because, and I say that because you have, for example, blackrock, one of the largest asset managers, retreating from using the term ESG entirely and just focusing on climate specifically and using the term transition finance instead of the term esg, which I think in some ways makes sense and in some ways doesn't make sense. And we can leave that to the side. It's clearly about the general political polarization and like post Trump reaction that's sweeping the country in many ways.
- [02:04]
Kurt Nickish
The digital world we're in today.
- [02:05]
Bob Echols
Yeah, you know, I kind of, I take this all personally, to be honest. So I'm a lot older than Madison and I've been at this for a long time now. And I remember like nobody knew what ESG was, right? And it's like, here's ESG and I'm not sure I like it. And it was being confounded with corporate social responsibility. And it's kind of like you're losing money. And then, then people kind of started to like it and people started doing research showing empirical relationships between the material ESG issues depending on the industry and performance. And then people started to like it and then it kind of got out of hand and asset managers were making excessive claims and then it started getting attacked. And so the way I kind of think about it. When I talk with my wife in the early days, I was irrelevant because nobody knew what ESG was. And then I was like the hero of esg. Everybody knows Bob and esg. That was a good thing. Now it's a bad thing. It's been confounded with woke. So I'm on my way to irrelevance again. Life goes full circle. Life goes full circle. This would be a great subject for a sociological PhD. My PhD is in sociology. I think what happened there were some particular triggers. I think that book by Vivek Ramaswamy where it kind of got confounded with woke. Mike Pence wrote that famous letter to the Wall Street Journal. Somehow it became like this carrier in this polarized society to sort of mean anything that the right didn't like about what the left is doing. So my guess is if you go into a red state and a politician goes, I don't like esg, you know, and one of the voters goes, well, what's esg? And they go, well, it's something the liberals like. You know, those people that want to take your guns away and abort babies in the eighth month? And they go, man, I don't like ESG either. Okay? So it has absolutely no meaning, right? So it's become this term, as I said, it's got confounded with woke, and it gets then tied into sort of, you know, these culture wars. And so I wrote a piece called the Sociology of Hate for esg. It's not just the right that hates esg. I mean, they're saying ESG gets in the way of value creation. There's people on the left that don't like it because it's only about value creation. It's just like the material issues for shareholders, and it's not dealing with systemic level problems. And so I think the term is basically past its sell by date, and we should just move on and focus on the issues. And we'll debate the issues. We'll debate climate change. We'll debate D. And I. You know, ESG had its time in the sun and its time to just let it go.
- [04:30]
Kurt Nickish
So you're both in agreement that ESG is like, it's over as a term. And really it's about environmental, social issues. Governance issues are gonna be debated on the issues, as Bob mentioned. Where is this going politically and then and legally?
- [04:48]
Madison Condon
Yeah, I think it's horribly complicated. And I don't think I don't see, like, any rosiness on the horizon. So even so, I've never referred to my Work as esg. Actually, my own, the one focus of my research, I've always thought of as, like, climate risk, as a financial risk. I get labeled as an ESG scholar all the time, which is fine. I understand why that is. But I don't think that just switching from ESG to, say, transition risks, I think that makes it easier to speak about. It's at least more coherent because it's not just like three random letters together.
- [05:19]
Kurt Nickish
You're saying what it is.
- [05:20]
Madison Condon
Yeah, but there's. I don't think the politics are really gonna go away anytime soon. Because if you look in the sort of. A lot of the politics around regulation in the insurance industry, for example, that's clearly climate change. A lot of what's driving the price spikes and the withdrawals, but they're still sort of trying to, like, politically, like, regulate around it in a way that doesn't really acknowledge the risk, the factual risks that are underlying, like why these withdrawals are happening. They're just sort of trying to make it political and turning it into, like, this ESG bullying in a way that just really leaves Florida citizens, like, without a lot of help.
- [05:56]
Kurt Nickish
I mean, the government, it's a regulated industry. If you have a state government that oversees it, it's a power play. Right. So are we going to have, like, 50 different answers to this?
- [06:06]
Bob Echols
Even when you look in the red states, how much the pension funds are really changing, when you talk to people there, maybe they're a little bit more quiet. They do have a fiduciary duty. So if it's a material issue for shareholder value creation, more or less, they're trying to take it into account. There's questions about the quality of data they have. The politics aren't going to go away. It's the way politics are. There's people on the left and there's people on the right, and we're seeing that play off with the SEC climate disclosure rule. I think for me, the deep issue is there's a legitimate debate. Put the crazies aside on both ends of the extremes, right? There's a legitimate debate to be had about what is the role of the public sector and what is the role of the private sector in dealing with systemic issues like systemic racism, like climate change. I think that to oversimplify it, the right thinks that companies and asset managers are trying to do too much. There's people on the left that think they're trying to do too little and they need to kind of step it up and do more because the public sector is failing and so I think if we could have a constructive debate with people having different political views around what can companies do, what can't they do, what can asset managers do, what can't they do? Clarify issues around fiduciary duty. We need to change the narrative in the debate because right now the get all the attention. That's what the newspapers want to write about, and it's kind of fun and stuff. And so when you get into the middle and you're looking for common ground, it's by definition messy. And what I found is that you have, again, people on both sides. If you don't subscribe to sort of every codicil in the catechism, you're excommunicated from the church. And if you're going to progress on these issues, you're going to have to do it in a bipartisan way, which means that people are going to have to learn to listen to each other and make some compromises.
- [07:59]
Kurt Nickish
It's a little, not very encouraging because there was for a long time you heard that government's ineffective on a lot of this. So, you know, the business world is going to be positive and it's going to make some changes and, you know, make progress. And now, I mean, what I'm hearing is that, like, the businesses are really being politicized too.
- [08:20]
Bob Echols
I'm not one of the more discouraged. I just think we're becoming more practical and more thoughtful about it. I think people have had excessive expectations or they're projecting things that don't exist. Like, you know, with ESG being woke, you know, I think it's kind of, in some ways, this has been good. It's forcing everybody to be more rigorous and disciplined about what terms mean and how they think about it and distinguishing between value and values. And so, you know, I'm not discouraged at all. I mean, life is hard, right?
- [08:47]
Kurt Nickish
Yeah, no, it's definitely a messy middle, for sure. So let's get into sort of like where this is going now more. I mean, it sounds like if things are more of a muddle and there's more political fights and there's more legal challenges that can really slow things down. So it raises a question of, like, whether or not companies can be effective in addressing these climate transition risks. How fast is their work progressing? Is it fast enough? With the financial crisis? Right. There was this big, huge catastrophe that basically led to a lot of change and new regulation and different business practices. Is something like that going to be needed for big change? On what we're now calling esg, I.
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Madison Condon
Wonder about that, about what might precipitate a change in many different areas of the business world. I mean, so one thing that I think about that I, that really limits businesses ability to simply respond to the bottom line, like what I think of as doing their basic job is the securities and Exchange Commission's Climate Disclosure Rule, which has been a huge lightning rod of political attack. And so it is a question like how do you expect asset managers even to make sure that their assets are efficiently allocated in a pure free markets approach if they can't get the correct information from the corporations that they're investing in? And that's been a huge lightning rod of debate.
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Kurt Nickish
And they have been asking for that too, right?
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Madison Condon
Yes. Most large instit institutional investors support the SEC's climate disclosure rule. Nevertheless, it's been sued in a whole bunch of different circuits around the country and has now been stayed by the securities and Exchange Commission pending resolution of the claim. And this problem stretches into, I mean I get increasingly worried as the occ, which is the banking regulator along with the Federal Reserve, the American regulators of financial institutions are pretty substantially behind the regulators in the UK and Europe, for example. And that includes just like getting up to speed on staffing and thinking of again thinking of transition risk and physical risk as a risk that is so rapid that maybe we need different means of assessment of thinking about it than we've done in the past. So maybe departing a little bit from extremely data bound, backward looking assessments of risk, being more willing to take creative leaps of judgment about what we think the future's gonna look like given the rapidity of change that we can expect. And I think this is happening a little bit and it has to happen inside the asset managers themselves as they about how am I going to invest in a climate change future? Am I only going to look at backward facing data on whether ESG is profitable or whatever? Or I'm going to use my own intuition to say I think that green hydrogen is going to be the way and we're just going to. This is where we're going to put our money into.
- [11:37]
Kurt Nickish
Yeah. Of all people, they should know that past performance does not guarantee future success.
- [11:43]
Madison Condon
You would think that they would have learned that.
- [11:45]
Kurt Nickish
Yeah. Bob, we just heard from Madison about Europe being further ahead. How are ESG metrics being used there? You know, these are global companies we're talking about, these are global risks that we're talking about, these are global supply chains that companies operate in. So it is in many ways just not only a US problem, what direction Is ESG moving in other places and will they pull the US Along?
- [12:10]
Bob Echols
I wouldn't say Europe is further ahead. I would say Europe is taking a different approach with their green deal. Basically what Europe is doing is that they are trying to take much more of a regulatory approach. The United States and the conservatives that I talk to that are involved in climate change are more of a free market approach of green Hydrogen is the thing. Then let's invest in green hydrogen and small modular reactors and carbon capture and storage and those things. I think the public private partnerships blended finance is important. I think the role of the central banks is complicated. But let me just put in a word for a carbon tax. Look, I was the founding chair of the Sustainability Accounting Standards Board, so I'm all for standards on sustainability reporting. But I think people are starting to expect too much from reporting alone. And if I could wave a magic wand, I'd take some significant percentage of the energy that's been spent arguing over scope one and scope two and scope three, disclosures in the SEC and double materiality. I mean, let's pass a carbon tax. I mean, it's not a silver bullet, but if you want to deal with a negative externality, taxing it is an effective way to do it. I've written a piece on that and most of the sources that I used for writing this piece were from center right organizations. There's a list of around 3,500 economists that support a carbon tax. And it drives me a little crazy whenever I bring this up, whether people are liberal or conservative and say we should have a carbon tax. And people say, well, we've never passed it and it's never going to happen. And so, you know, there's no point in talking about it. I think that's just a cop out. I think it's a cop out. If we can pass gay marriage in this country, we can pass a carbon tax. So I would love to see sort of, you know, some political will, some bipartisan political will to get behind a carbon tax.
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Kurt Nickish
What about the role of technology? Is new technology likely to change the way we evaluate corporate ES and geographies metrics?
- [14:03]
Madison Condon
Oh, that's an interesting question. I mean, I think you could even take what you mean by that question in two directions. One might be just like technology helping investors do their job, like trying to keep track of supply chain emissions. And I think there has been a lot of changes in that space, like scope three, which is supply chain emissions are sort of notoriously hard to get right and to keep track of and there's been like a lot of different innovations in supply chain reporting using just like, like blockchain, for example, to try to help companies do that reporting. But where I thought your question was going is technology and innovation, like simply on the asset class types, meaning there's technologies for the hard to abate sectors that I didn't think would exist. Three or four years ago in Massachusetts, we invented low carbon concrete. Concrete has very historically been a very hard to abate industry because its emissions are not just based from like the energy it uses in the making of concrete and cement releases carbon itself. So again, when you're thinking about like, ESG investing, if you're thinking about it in the climate transition space, it does require a lot of like, judgment calls and leaps of faith because a lot of these technologies are unproven. They're brand new, like green steel, totally brand new. We're bringing green steel, like back to America. We're having low carbon concrete. That's not really where your question was going. But I think innovation is like a very important part of quote, unquote, ESG investing because I see the markets changing really quickly and there's going to be like a cascade effect as we invent different ways to bring more and more industries into the fold of being zero carbon. And that really kills in the aggregate fossil demand.
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Kurt Nickish
Got it.
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Bob Echols
You know, if you think about technology and sort of ESG measurement, I mean, there's all kinds of activity going on saying we're going to use artificial intelligence and so we're going to be able to get data on a company's environmental and social performance, maybe less on governance, so that what is being reported by companies will matter less. Because there's going to be all these other ways we can use big data and metadata and this and that and the other thing, I think, you know, the jury is out on that. But I think there's a lot of activity going on. And it kind of remains to be seen if that data is going to be useful to asset managers or not.
- [16:15]
Kurt Nickish
Because it does sound like a lot of work. I mean, it's like keeping track, getting this data, analyzing it. Institutional investors can do it. They've got giant teams that help look at that. And I just wonder if the technology helps more of that work be done at a lower cost so that it can go down market, more investors have access to it.
- [16:35]
Madison Condon
There's this growing area called spatial finance, which really blends a lot of the people who work in geospatial data with people who work with financial analysis and this is a huge and exploding area. It will map all the steel companies in the world and what their exposure to water risk is, for example. And that will be like a database that will be assembled and that you can buy. It takes a ton of number crunching. It takes a bunch of different skills that maybe traditionally financial analysts didn't have statistics, but it's hugely emerging. And yes, this access differential is a problem. I don't know how you solve that. I'm not sure that I believe in the idea that retail investors should be running catastrophe models. I sort of think that we have institutional investors for a reason, but take that or leave it.
- [17:20]
Kurt Nickish
So where is ESG going? We know we're dropping the letters. We're going to debate things on the issues. How optimistic are you that investor actions are still going to change firm behavior on E S and G strategies? Even though they're separate, they're not put together as a label anymore, you know.
- [17:41]
Bob Echols
Your question, maybe I'm projecting sort of is a presumption. As environmental and social issues have become more material, as they would say, and important to value creation over the short, medium and long term, investors have started paying more attention to those. But again, the contested domain is, you know, are companies using these data for shareholder value creation? And then are they doing what some people would expect them to be doing to make the world a better place that will be contested domain forever.
- [18:15]
Kurt Nickish
Mm. We've always had that.
- [18:17]
Madison Condon
This is a thing that I. That I think a lot about, and I've written about this. So shareholder primacy really took off post 1970s. The purpose of a corporation is for the shareholders. Within that, though, is this question of does that mean you have to maximize the share value or do you have to do what shareholders want? And that conflict is manifested in a bunch of different ways. Meaning, like, are shareholders allowed to vote for things that the management doesn't think is share maximizing, but the shareholders do? What should the law say in that instance? Like, should the corporation maximize the value according to what's in the manager's mind, or should it do what the shareholders want? And I think a lot of those skirmishes actually are going to play out and shape the future of esg. Like, what types of proposals we allowed to be brought at the shareholder ballot? Like what, how detailed they are allowed to be, how often they're about to be bought, what types of disclosures shareholders are able to ask for, how shareholders are allowed to shape executive compensation. I think there's a lot of stuff in the weeds that is really about like, how much power do we give shareholders to like, direct corporations in ways that isn't explicitly what the CEO thinks will be share profit maximizing? I think that will shape the future of the E and the S and the G going forward.
- [19:32]
Kurt Nickish
That's so interesting.
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Bob Echols
I think Madison's point about shareholder proposals is really good because that is what's being contested now.
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Madison Condon
It's suing one of its shareholders right now.
- [19:41]
Bob Echols
I haven't seen an anti esg shareholder proposal. There's not that many and I haven't read them all, but I haven't seen any that make any sense. They're kind of values driven. At the same time, not every pro esg shareholder proposal is a good shareholder proposal. I mean, just because it's pro esg, you can't assume it's a good shareholder proposal. Some of them are repetitive. Some of them are too prescriptive, some of them are too down in the weeds. And so I think if we had kind of more clarity about what makes for a good shareholder proposal, which ones the SEC will allow or not, that'll sort of play out. And like with everything, there's going to be sort of political forces and you know, who's the president and that means who's the chair of the sec. And the winds will kind of blow back and forth. It's America. Right?
- [20:23]
Kurt Nickish
Yeah. I have to call out the irony here. Right. Because if you have this rise of shareholder Primacy in the 70s, it was basically shareholders saying these CEOs, this managerial class, they're not doing what we want, which is make enough money for us. And so they put this incentive in place to give managers CEOs stock options. Right. And stock in those companies that vest at a certain time. And that's basically how they incentivized CEOs to go after profits. Now you have a situation where we need you to think about long term risk. But the way they've incentivized CEOs is their own stock in that one company just five years down the road. That's all they're thinking about. And you have this new tension now over how to manage that. So that's. This separation of ownership and control is playing out in a whole new way. A little bit of a whiplash from the 1970s. It's fascinating.
- [21:22]
Madison Condon
You summed it up really well. And I think that that is one of the dynamics that is really shaping what's going on right now. I agree. It's super interesting. There's been like early days of people trying to amend CEO pay to take into account externalities or emissions targets. And there's scholarship on that, I think. You know, right now the incentives have not really been large enough, I think, to really change the sort of directional purpose of how a CEO sees her role in the company. It's been like small and it's still mostly stock options. But that is one channel of changing how corporations work, for sure.
- [21:54]
Kurt Nickish
Right? Yep. And that's something shareholders have power over. Right. Over those boards to do that. Yeah. We've talked a lot about the politics. We've talked a lot about, like, institutional investors. But it's interesting that it really comes down to like, shareholders, boards and managers. In the end, that's where you really see the future of ESG playing out. What's the biggest misconception out there about the future of ESG and where this movement is going that you want to take this opportunity to clear up?
- [22:27]
Madison Condon
A lot of my colleagues who don't come from the climate space, I don't think that they appreciate the physical risks that are absolutely coming down the pipeline. And to me, when you fail to appreciate, even in the next 10 years, things that science says will happen or will happen with like a high likelihood, then you start to, I mean, I start to connect dots in ways that I think that they don't simply because they haven't really read into the science. We're going to see a bunch of bankruptcies and a bunch of climate related financial failures. Whether or not that amounts to a systemic crisis over the next decade, I have no idea. But I think you're already seeing in the utilities industry, Warren Buffett being like, oh, the state has to come in and own all the utilities stuff. I just, I see things happening so quickly because of the physical manifestations of climate change that I think we're in for like a wild ride. And things are going to change a lot more, including on pressure, like via the Universal Owner Channel, as people get more and more fed up with some of the devastation that they're experiencing.
- [23:27]
Bob Echols
I mean, you know my major point on this. So a couple years ago, I started my GOP outreach campaign when I wrote a nasty article about Republicans. And a Republican friend of mine called me and we had a good conversation. Along the way, I have met a number of conservatives whose lives are dedicated to climate change. And they can be investors and they can be corporate executives and they can be board members and they're think tanks and they're NGOs. What I think needs to happen is that you need to have a conversation between the groups. I'M not an expert on this stuff, but I think until you can get a bipartisan conversation around climate change, we can never ignore the politics. And so, you know, we need to deal with it.
- [24:06]
Kurt Nickish
Well, Madison and Bob, thanks so much for sharing your work and your expertise.
- [24:11]
Bob Echols
Good to be here.
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Madison Condon
Thanks for having us.
- [24:20]
Kurt Nickish
That's Bob Echols, visiting professor of management practice at said Business School at the University of Oxford, and Madison Condon, associate professor at Boston University School of Law. This is our last episode of the spring semester. We'll be back in the fall with more episodes. We'll look at how to ensure continued innovation and access to gene and cell therapy, disinformation and social media and more. In the meantime, check out any episodes you may have missed. And so that you don't miss out on the new ones coming up this fall, please follow Is Business Broken Wherever you get your podcasts.