Has ESG gone guerrilla warfare?

There has been much discussion recently over declining institutional support for environmental, social, and governance (ESG) investing theory. Many indications suggest that US shareholders are divesting from ESG-themed funds. Some of the largest asset managers have publicly toned down their embrace of ESG in the face of rampant inflation and GOP-led state pushback. The mere mention of “ESG” has also been raised less and less during quarterly boardroom calls, while elite CEOs like Larry Fink of BlackRock now refuse to utter the term ESG over concerns that it has become too politicized.

While many see this as a sign that ESG is on the decline, it can be easy to overlook what is occurring underneath the surface. Proponents are merely shifting tactics in the face of political pushback. ESG is still alive and well, even at many of the firms that are publicly backing away from it. Left-wing shareholder activism has shifted underground, as institutions adopt guerrilla tactics.

For guerilla warfare, the predominant strategy is to avoid head-on conflict with enemy forces. When the enemy is perceived to be superior in size, the goal is to utilize a range of tactics to gradually wear one’s opponent down. This can be done through a variety of methods, including surprise attacks, targeted ambushes, theft of supplies, hit-and-run, and tactical sabotage.

The aim in guerrilla warfare is to wear the more powerful enemy down by depleting their time, manpower, and resources with constant asymmetrical skirmishes. The aim with ESG is not so different. In guerrilla ESG, the major institutions provide the impression of a full retreat from controversial environmental and social causes in the face of noteworthy red state divestment and lawsuits targeting ESG funds.

Yet behind the scenes, asset managers and proxy advisors continue to support shareholder resolutions advancing ESG goals. Many large firms continue to maintain internal ESG practices. This is akin to a hit-and-run approach, giving the outward impression that one is defeated, only to launch successive counterattacks after an initial retreat.

The most notable example of this has been BlackRock’s decision to withdraw its corporate position in the ClimateAction 100+ Alliance, leaving only its smaller global arm as a member. StateStreet Global Advisers and JP Morgan Chase took more ambitious steps to withdraw completely from the alliance.

Despite this retreat, BlackRock supports ESG proposals overall. While on paper, the asset manager supported 7 percent of 399 environmental and social (E&S) shareholder proposals in 2023, they actually support 57 percent, because 50 percent of these proposals are ostensibly aligned with the ESG-based measures that BlackRock outwardly advances.

When BlackRock reported that one of the primary reasons for the high rate of denials is because many E&S proposals are “simply redundant”, this was likely code for BlackRock has already adopted iterations of what these proposals sought to advance. Much of this is inspired by a large proportion of management proposals that BlackRock supported in 2023 (89 percent).

BlackRock consistently aligns its support of management proposals with its annually released “climate and nature-related risk” global principles. Many management proposals carried ESG measures that were subtler and more substantive than the repetitive shareholder proposals BlackRock denied, thus warranting greater support.

In essence, BlackRock does not need to outwardly support many ESG proposals since it has adopted subtler measures with similar goals. Likewise, nearly half of the S&P 500 listed companies predicate executive compensation on ESG activity, despite scant mention of ESG in their corporate earnings calls.

This cloaked support is also reminiscent of surprise attacks in guerrilla warfare. When the enemy is blindsided by an assault they weren’t expecting, the impact can be much more effective than if one was expecting it in advance and had time to defend. For asset firms, supporting proposals that deceptively advance ESG objectives can allow many to pass into effect under the radar of shareholder review, given the cloaked intentions within the proposals.

A related tactic that proponents of guerrilla ESG are using is subterfuge. This is when proponents of ESG give the impression that they are publicly backing away from their support, only to embed deceptive, less offensive terminology used to more easily advance ESG goals in shareholder proposals. In their proposals, they swap politically toxic ESG phrases like “DEI” with “diversity,” “climate change reform” with “sustainability,” and “stakeholder capitalism” with “conscientious capitalism.”

 “Some have used different language that avoids phrases like ESG; others have avoided even talking about it in public venues,” according to Justin Worland writing for Time magazine. “But in operational plans and corporate-strategy sessions investors and business executives in most industries say they haven’t backtracked at all, particularly on environment- and climate-related issues.”

This has largely become the modern approach of corporate ESG. To avoid a head-on confrontation with powerful political dissidents over ESG matters, business executives have cloaked their support or embraced ESG by another name.

While public support for ESG has largely been on the downturn, one shouldn’t assume that ESG isn’t being adopted behind-the-scenes. Shareholders should be wary of deceptive wording and ulterior methods used to advance ESG within corporations. These layers of complexity show that there is more to the ESG struggle than meets the eye.