How companies really feel about ‘woke’ investing

Publicly, US corporations say the right things as part of their thinking about environmental, social and governance factors. So how are executives approaching the effort to make ESG a core component of their management philosophy?

Within the C-suite, there is concern about the value of ESG metrics, but also support for recent political pushes against ESG by statewide Republican leaders, including Florida Gov. Ron DeSantis and Texas Gov. Greg Abbott.

That’s according to a new CNBC survey of chief financial officers at top US companies that shows frustration with both regulators and asset managers and executives when it comes to the current ESG pace.

CFOs are always worried about overregulation. In the quarterly survey, excessive regulation by CFOs is often cited among prominent external risk factors, including new bottom lines. The most direct way ESG regulation affects companies is through the adoption of Securities and Exchange Commission regulations, including the climate disclosure proposal currently nearing implementation. According to the survey, only 25% of CFOs polled by CNBC support the SEC’s climate disclosure proposal. More than half (55%) of CFOs oppose the SEC’s climate rule, with 35% saying they “strongly oppose” it.

The CNBC CFO Council survey was conducted Sept. 12-Sept. With responses from 21 CFOs, 27. The board includes CFOs from many Fortune 500 companies (44%), and half are from Fortune 100 companies.

In recent conversations with CFOs on the board, there is evidence of a split between technology firms who see an opportunity to help firms across sectors of the economy with the data requirements of ESG disclosures, and broader CFOs who struggle to understand their costs. new disclosures by companies will generate a return on investment – and how the disclosures will both be used by investors in stock selection and create value for investors.

A critical challenge for CFOs with the SEC’s new climate disclosure is the lack of a clear link between climate data and financial reporting. The closest analog CFOs report to this new approach are non-GAAP metrics adopted in dialogue between Wall Street and management within industries (if not always by the SEC). But non-GAAP measures within an industry are different from common approval across industries, such as greenhouse gas emissions.

“Proponents are saying that we need to do something here because if we don’t understand the carbon transition better, there are costs to companies in the economy. Then the next question is, ‘how do we understand it better?’ … The SEC speculates that total greenhouse gas disclosure will facilitate that understanding. Investors “Requiring information with the expectation or hope that it will be meaningful to the public is an unusual approach to disclosure mandates,” said Jay Clayton, former SEC chairman and chief policy adviser. Sullivan and Cromwell.

Clayton says the first task for CFOs when it comes to climate disclosure is to be honest with investors and stakeholders about this disconnect. “Don’t be wishy-washy. Don’t say it’s more or less than it is. … Here are the numbers and we’re trying to figure out how to use them,” he said.

For some within the investment community, it is too late to debate the importance of climate disclosure for companies or the broader value of ESG. Eileen Murray, former chief executive of Bridgewater Associates, the world’s largest hedge fund, who now serves on the boards of Guardian Life, Broadridge Financial Solutions and HSBC, says cost should not be seen as a barrier.

“If a company has to make disclosures and it has some executives who are ‘not into ESG,’ it needs to think about the value of not worrying more and focusing on that as a company,” Murray said.

His experience leading investment management during the regulatory fight over credit risk disclosures makes him skeptical that the new disclosure is too expensive or complicated. “Years ago, I could have told you, ‘I have credit risk today,’ and if I didn’t have policies and procedures and people to manage that, if I wasn’t better than my competitors over time, I would be in a bad place. I feel the same way about ESG.” I’m saying things,” Murray said.

The point, critics like Clayton say, is that the disclosure may not be the most useful information to present to investors about climate risk. Property and casualty companies are examples he cites of direct greenhouse gas emissions being less amenable to climate risk disclosure than a company’s analysis of global greenhouse gas emissions, as well as temperature and sea level rise in the coming decades.

“They’re going to have to do the work and come up with the numbers. … But there’s a better place for dialogue,” Clayton said. “‘Here’s how we model sea-level rise and what it means for our book.’ This is more urgent,” he said.

For many companies that must comply with the new disclosure requirements, he says, if investors and stakeholders go further and describe the climate factors most relevant to their business, it may not be their own emissions.

ESG investors are feeling the heat. It all comes back to financials, Lauren Taylor Wolfe, co-founder and managing partner of Impactive Capital, said on CNBC’s Alpha Delivery conference on Wednesday. “We believe that non-reversible ESG is simply not sustainable,” he said. “We only focus on risk-adjusted returns,” he said.

“We are not veiled advocates of ESG,” said Martin Whittaker, founder of ESG research nonprofit Just Capital, which annually publishes an authoritative ranking of the best companies in ESG. And he said the sentiment expressed by CFOs is likely echoed at many companies. “It’s the ESG ratings that drive companies crazy… They’re not transparent, they’re completely black boxes,” Whittaker said.

ESG rating firms were recently called to Capitol Hill to explain their methodology.

“We don’t know who’s using them, and there’s no standard metrics and validation of the underlying data, so the ESG community itself has created a lot of problems,” Whittaker said. “But I think that investors, including pension funds and asset managers, who see the risks and opportunities and investment relevance through an ESG lens … it’s real, it needs to be analyzed properly.”

Just Capital is watching what’s happening and supporting the capital and business world as a “force for good” requires more and better data to market. “We’re here to try to get real results,” he said. “It also has vested interests for business.”

BlackRock, the asset manager most closely associated with ESG (and also the world’s largest money manager), has taken steps to soften its stance as it becomes the public face of political pushback. While its CEO, Larry Fink, has rejected claims that ESG is “waking up capitalism”, in his latest annual letter to shareholders he angered some climate investors by saying, “Avoid entire sectors – or simply move carbon-intensive assets out of public markets”. to private markets—will not be able to bring the world to net zero. And BlackRock does not have a policy of divesting from oil and gas companies.”

But more state leaders are pushing their own form of investment from firms including BlackRock, which invest in state assets based on ESG factors these politicians disagree with. ESG-compliant asset managers, including Texas, West Virginia and Florida, are prohibited from managing state funds and bidding on new state business contracts.

Ken Griffin, founder and CEO of hedge fund giant Citadel and a prominent supporter of Florida Gov. Ron DeSantis in the markets, drew a line in Florida’s battle with Disney over gender and gender identity policy — DeSantis moved to revoke Disney’s special tax status. After CEO Bob Chapek, under pressure from his own employees, opposed a Florida law banning the teaching of gender identity in schools to young children.

“It’s a complicated fight with Disney,” Griffin told CNBC’s Scott Wapner on “Delivering Alpha” on Wednesday. “First of all, I think Disney has put themselves in a position where they’re going to be met with a punch. I think the Governor of Florida is perfectly fine to hit back with words,” he said. But Griffin added, “I’m always concerned when the government does things that seem retaliatory. So when the state of Florida revoked Disney’s special tax status, that could be interpreted as retaliation to me. And I think the state level of the U.S. government and the federal the level always remains above anything that appears to be a politically motivated vendetta.”

CFOs were more broadly in favor of pulling back ESG from states, according to a CNBC poll, with 45% of CFOs saying they support moves by states to ban investment managers using ESG factors from using state pension fund work. While 30% of CFOs said they were neutral on the issue, only 25% of CFOs opposed the government’s move, and only 5% expressed “strong” opposition.

“I think the criticism is deserved,” Wolfe said in Delivering Alpha. “When you have that much capital flowing into a space, you know it’s almost like the wild west in some ways. We’ve had trillions of dollars of capital committed over the last few years to, quote, ESG strategies. … you’re expanding your universe of investment opportunities. you shrink, which forces you to shrink your returns,” Wolfe said. But he dismissed the notion that this would be “compromising” when it comes to achieving investment returns and improved ESG performance.

“When the ball swings either way … it’s going to come back and there’s going to be criticism. So I think right now we’re more … separating between some less attractive strategies,” Wolff said.

The SEC is also scrutinizing ESG funds more closely.

Another reason why CFOs at publicly traded companies support pushback against the asset management community and firms like BlackRock has less to do with fund performance than proxy battles. Because large index fund managers dominate investment flows and represent one-third of companies’ shareholder bases, they increasingly use this power to influence the outcome of shareholder votes on ESG issues and climate. . It also caught the attention of BlackRock as it faced more scrutiny from regulators and Capitol Hill. Now, through a process called cross-voting, the proxy takes steps to limit its influence on votes and gives the shares it controls back to key clients to vote on their own.

Murray, who has had many conversations with CFOs and other executives about ESG implementation, is concerned about where the discussion is headed. “It shouldn’t be about winning, it should be about progress, and it’s very polarized on ESG,” he said. “Really smart people spend time figuring out how to polarize this. Let’s spend time on solutions,” he added.