August 2023 | 

ESG: Changing the Conversation, Maintaining the Message

ESG: Changing the Conversation, Maintaining the Message

Here’s one way to deal with contentious, politicized issues: stop talking about them. At first glance, that’s what BlackRock CEO Larry Fink is doing with ESG, saying he’s “ashamed” that he got drawn into a highly combative discourse on the subject. “I don't use the word ESG any more, because it's been entirely weaponized,” he said recently.

But that doesn’t mean his firm is backing down on its commitment to include environmental, social, and corporate governance (ESG) issues in its investment decisions. “Our investment conviction is that climate risk is investment risk,” declares the BlackRock website. “We believe that society is on the cusp of transformational change towards sustainability.”

Wharton management professor, vice dean, and faculty director of Wharton’s ESG Initiative Witold Henisz agrees with Fink’s refusal to use the term ESG — to a point. “He is half-right. But I am disappointed, honestly, because he is someone who could engage in the debate and win it.”

“Fink doesn't want BlackRock to be tarnished or brought into this political firefight,” Henisz continues. “He wants to minimize the number of hours he has to spend on the hot seat in Washington [the conservative-led ESG Congressional Working Group has seven hearings planned]. He's trying to pull back, but we need someone who can explain this issue in a way that makes it less political.”

Henisz, whose research, teaching, and consulting has been focused for decades on the management of political and social factors by multinational corporations, says ESG investing is in its infancy, and requires “more data and better analysis. If you want to get ESG off the politics page and get it back into the finance page where it belongs, that’s what we need. It’s not wrong, and it’s not part of some socialist agenda. Measuring a company’s ESG impact today is an imperfect science, but it is evolving, and better ways to evaluate ESG criteria are being worked on.”

Reshaping the Conversation

That said, Henisz agrees that a change in the conversation makes sense. As an outspoken proponent of sustainable investing, which considers factors like climate and human rights, Henisz had been focused like BlackRock on climate risk as investment risk. But he sees the inherent value in widening the dialogue.

“At a recent conference, an attendee pointed out that when we talk about climate change, it's incredibly unhelpful to talk about a one-and-a-half- or two-degree Celsius target from the Paris Climate Accords. First, large portions of the United States don't know or use the Celsius scale, and second, they don't like Paris and they view the Accords as some sort of global cabal. When we speak about the climate crisis in those terms, we're digging ourselves a hole before we even engage in debate. Let's instead put this in terms that are more universal and not so politically charged.”

Henisz says those terms should include more “S” and “G” than “E.” What does that look like? “Focus on new jobs, including those in Kentucky and West Virginia battery factories. Focus on cleaning up the air and rivers, so you can fish or visit the national parks with your families and not be affected by pollution. Focus on job security and a living wage. If people work hard, if they put in a 40-hour work week, they shouldn't be struggling to find housing or find food. What are we doing to make sure companies are paying a living wage? Is the government addressing some of the challenges for people who are below that threshold?”

“This set of issues is less divisive, and opens the door to dialogue,” he says. “It’s easier for people to relate when you ask them if they would invest in a company where there might be accounting fraud or corruption, where somebody is paying bribes, and the risk committee isn't doing anything about it. Wouldn't you want to know that? Whether you're red, blue, or purple, you want to be aware of malfeasance, fraud, and illegal or illicit activities going on.”

“G seems to be the set of issues that voters and shareholders in any state understand. If the CEO gets five times as much money as they did the year before, but they destroyed billions of dollars of shareholder value, most people agree that's wrong. That’s about ‘leading with governance.’” Henisz says widespread agreement on those G issues can then lead back to the climate transition and newly created jobs.

“Climate is like excessive executive pay and a risk committee that isn’t doing its job,” he continues. “We've seen the storms. We've seen the orange skies. We've seen the floods. We've seen the 100-plus degree days in the southwestern U.S. We've seen the power outages. We need to attend to this. But start with G, because it's not as charged.”

Returning to the Investment Discussion

As faculty director of a new suite of Executive Education ESG programs, including Wharton ESG Essentials, Henisz stresses that a shift in the conversation doesn’t mean taking sustainable investing off the table. “Let's continue to fight the fight. Let's hold our ground and say, ‘We haven't got this all figured out. The data is imperfect, the analysis is imperfect. There's a lot of work to do.’”

“If I was Larry Fink,” says Henisz, “I would say, ‘Wait a minute, let's back up here. This doesn't have to be politically charged. The idea that you can separate profits from the energy transition is clearly not about business. As we accelerate the path to the energy transition, as alternative renewable fuels become cheaper, as fossil fuels start becoming uncompetitive, people need to start thinking about their fuel supplies and their investments. So let's talk about what we're doing in terms of sustainable investing and how we do it.’"