Although there is no formal definition of Environmental, Social, and Governance (ESG) criteria, it is widely accepted as a system to mitigate risks and impact a company’s corporate interests. Many companies have implemented ESG strategies as a means of adhering to internal and external pressures from stakeholders.
Over time, ESG strategies have made their way into corporation infrastructure as a long-term transition to sustainable and accountable energy interests. However, the new generation of ESG investors is changing the landscape for corporate accountability and the transition to sustainable energy. The consensus is that ESG strategies are here to stay and will only increase as Gen Z becomes proactive investors and consumers.
Insight from an ESG Expert
We reached out to Rebecca Davis, a partner with the law firm Arnall, Golden & Gregory in Atlanta, GA. As a partner in Litigation and Dispute Resolution and Environmental Practices and with over 20 years of experience in litigation and consulting on environmental matters, Davis provides critical insight into her counsel. Davis holds a wealth of knowledge on regulation compliance, remediation, alternative energy projects, and due diligence.
With adept skill in navigating complex environmental litigation and enforcement cases, Davis has hands-on experience in both state and federal courts in cases involving toxic mold, stormwater violations, and others.
In an exclusive one-on-one, we sat down with Davis to glean from her insight and experience with the following questions on the 2024 ESG outlook.
Where is ESG in 2024, and why is it now considered a key part of a company’s financial value proposition?
Davis: ESG, as the concept of socially conscious capitalism, is not going to go away.
However, in the near future, we may see more division based largely on increasing political divides. But politics will not be the only driver. As to the energy sector and climate-related initiatives, although more states that traditionally lean blue will likely implement more stringent emissions policies, we will still see other more traditionally red states invest in renewable energy initiatives if there is a business case for doing so. That business case will be largely created by both federal grants and tax incentives, as well as increased interest by Millennials and Gen Z as they look at more environmentally and socially sensitive investments.
There also may be increased focus on certain areas of ESG over others, especially with respect to supply chains. ESG-related goals and initiatives will continue to be part of the discussion in the boardroom.
Companies within the U.S. will see more pressure, especially as to disclosure and emissions, from regulations passed in California and some other states, as well as the European Union through the Corporate Sustainability Reporting Directive.
Regardless of the political climate in the U.S., companies will be forced to respond to global pressures as we continue to exist in a global economy.
What percentage of S&P 500 companies publish ESG reports, and what does this suggest about the future of ESG initiatives?
Davis: ESG reporting remains complex. Companies have become and will continue to remain cautious about ESG and even sustainability reporting amid the upcoming presidential and congressional elections. Republican candidates are expected to attack “woke” initiatives, while democratic candidates are likely to focus on diversity and inclusion and climate change. Promises of pro- and anti-ESG legislation are also expected from both sides.
Thus, ESG reporting in 2024 may be complex, even for companies who reported their results in prior years. As to the numbers, by 2021, 99% of S&P 500 companies were publishing ESG-related information, either in the form of a stand-alone ESG or sustainability report or at least through website information. By 2021, most companies also were using at least some established framework (e.g., the Sustainability Accounting Standards Board (SASB) standards, Global Reporting Initiative, International Sustainability Standards Board (ISSB), etc.). But notably, that does not mean that these same companies are talking about these initiatives as much as in previous years. Since 2021, mention of ESG initiatives in earning calls have become less prevalent, and the topics are more muted, even if public-facing reporting still exists.
Indeed, ESG-related reports have already become so widespread, and companies have already incorporated their sustainability plans into their core business strategies, which has reduced the need to rely on or highlight certain ESG-components as part of their corporate messaging.
How do Gen Z consumers and investors view ESG, and what might this mean for companies in the coming years?
Davis: Millennials and now Gen Z have grown up in the face of climate-change, and they are more likely to accept global warming as a truth rather than a political debate topic. The familiarity and fear of climate change has thus, in many respects, shaped the overall focus of ESG investing for these two younger generations.
Combined, Millennials and Gen Z make up more than 42% of the population in the United States. Similar to their investment strategies, their spending habits are different than all prior generations. There is now an obvious rejection of the shareholder primacy doctrine by younger generations, and at least two-thirds of Millennial and Gen Z investors have cited environmental and social issues as being relevant to their investment strategies. At least one study reported that both Millennials and Gen Z investors believe that their investment strategies should influence the governance policies and practices of publicly traded companies, even if it creates risks for their own investments.
With more widespread availability of sustainable purchases, the definition of consumption has changed to include access to products or services, such as streaming services, rather than just ownership.
Moreover, a five-year study analyzing 600,000 products from 44,000 brands from 2017-2022 concluded that products advertised as pro-ESG averaged 28% cumulative growth over this period versus 20% for products that made no ESG claims. Additionally, the market share of products making pro-ESG statements generally grew at a faster rate. Thus, at a minimum, the study suggests that companies should strongly consider integrating sustainability practices into their core business strategies to attract consumers, avoid market share disruption, and meet the demands of Millennials and Gen Z.
How have you seen regulators respond to the rise of ESG, and what implications might this have for companies looking to embrace ESG initiatives?
Davis: The response of regulators has been mixed, and there are sharp divides across both party lines and state interests.
In 2022, under the Biden administration, the SEC proposed three rules directed at investment funds and climate. The purpose of the first rule is to curtail “greenwashing” of fund names, and it requires a fund to invest 80% of its assets into funds that are reflective of the fund name. The second rule requires registered investment companies and advisors, and potentially even unregistered advisors, to disclose their ESG-related strategies in fund prospect uses, brochures, and annual reports.
The third rule is the ESG Climate-Related Disclosure Rule. If passed, the rule will require all organizations with SEC reporting obligations to disclose certain information about direct and indirect greenhouse gas emissions (i.e., scope 1, scope 2, and scope 3 emissions). Some states, such as California, have already passed their own regulations seeking the same or nearly identical outcomes. Republican senators and members of congress responded by taking aim at ESG through various task forces and proposed bills.
Additionally, several states have passed legislation, typically in alignment with the political leanings of its voters. Examples include Illinois, Maryland, New Mexico, Oregon, Maine, Connecticut, Massachusetts, and New York, which have passed legislation promoting ESG investments, with many passing laws promoting carbon neutrality.
Other states with more politically conservative leanings, such as Texas, Kentucky, Florida, Arkansas, Alabama, North Dakota, and Wyoming, have passed legislation that generally:
- Requires or authorizes states to divest from financial institutions engaged in economic boycotts or discrimination against the fossil fuel or firearms industries, or prohibits contracts with companies that discriminate against these same institutions;
- Requires or authorizes states to divest from financial institutions that discriminate against any industries based on ESG factors, or prohibits contracts with companies that engage in any such discriminatory practices; or,
- Prohibits financial institutions or companies from requiring, disclosing, or providing services based on employment of ESG standards.
However, movement to block ESG initiatives in the U.S. may ultimately prove futile for companies that wish to maintain a multinational presence. Companies, including U.S. companies operating in Europe, may need to comply with certain European Union (EU) regulations, including the Corporate Sustainability Reporting Directive (CSRD), Sustainable Finance Disclosure Regulation, and Corporate Sustainability Due Diligence Directive. These EU regulations facilitate uniform sustainability reporting and can affect U.S.-based companies with minimal ties to the EU. In addition, the CSRD introduces a mandatory assurance obligation for all reported sustainability information.
To avoid the pitfalls of operating in anti-ESG states, companies that must comply with EU regulations, or that simply wish to implement pro-ESG strategies, will need to plan early and review their ESG-strategies often. Careful review of marketing strategies, state-specific ESG regulations, supply chain regulations, and strict record keeping practices will also prove critical in the coming years until there is some market and rule stabilization related to ESG.
A New Generation (or Two) of Investors
The millennial generation, born between 1981 and 1996, and Gen Z, born between 1997 and 2012, collectively make up over 42% of the US population. These two generations present unique demographic profiles with more diversity than previous generations. Such cultural diversity has sparked a revolution in the market landscape, as Millennials and Gen Z, in particular, consider social responsibility and conscious business practices more attractive for investing and consumer purposes. As many as 55% of millennials and Gen Z Americans express a willingness to pay a premium for sustainable products over products with greater environmental or social impact.
Based on years of research surveys, these generations of future investors and consumers are likely to drive the market toward the availability of sustainable options, with an emphasis on ESG-related practices.
Products created with ESG principles have seen a rapid increase between 2017 and 2022. In fact, products advertised as pro-ESG averaged 28% cumulative growth versus 20% of products without ESG claims. This trend by Millennials and Gen Z indicates that ESG initiatives are the new direction of the market, but time will tell how they fully impact the investment space.
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About the Author: Jess began his career in client relations for a large manufacturer in Huntsville, Alabama. With several years of leadership under his belt, Jess made the leap to brand communications with Bizwrite, LLC. As a senior copywriter, Jess crafts compelling marketing and PR content with a particular emphasis on global energy markets and professional services.
