Where Does ESG Stand Today?

Dan Loney: The change in administration after the November election led many to expect big changes in various areas of government, with the impact felt outside of Washington, D.C. One area to focus on is that of ESG. Where do each of those components stand at this moment, especially as we approach Earth Day? Pleasure to be joined by Vit Henisz, who is a vice dean and faculty director of the ESG Initiative here at the Wharton School. He’s also professor of management. Vit, where do you think things stand at the moment?

Witold Henisz: We’re in the midst of a big shakeout and a really important one. The tides have turned from this being all things to all people, and popular, and a win-win to a much more critical perspective. I think in some ways that’s helpful. A lot of the greenwash is going away. Doesn’t make sense to claim you’re doing something that you’re not doing. But there’s also a lot of concern around, what does it mean to advocate? To be out there as an ESG leader, to be putting your neck out? Could you get a boot on your neck if you do demonstrate that kind of leadership? So, we’re really seeing people staying a little more quiet. A lot of the hard work is still going on, and I think in the end, counter intuitively, we’ll be better off for having had this shakeout. But it’s not pleasant in the midst of it.

Loney: You and I talked a while back about the investment component that has been brought into ESG. Where does that stand at the moment? And the dynamics of where the global economy is right now?

Henisz: There’s still a long-term financial interest in being attentive and taking into account environmental, social, and governance information. As part of this conversation, let’s just level-set what we mean by ESG. ESG is the systematic inclusion of financially material environmental, social, and governance information as part of an investment or strategy-making process. Why would you want to leave any financially material information out? At some level, it should be in there, so there is still investor interest in this.

But some of the idea that it generates quick returns, or that it’s easy, or you can just buy some off-the-shelf data, or that it always outperforms — that never held up. And it’s been exposed, and people are nervous. Fund flows are coming out of ESG funds, because there’s a lot of concern about short-term performance, about who’s actually doing the hard work, and who’s safe to invest in. Was the firm I was invested in just engaged in greenwash? There’s a lot of concern and trepidation, but the long-term impact of bringing more and better information into your calculation and being attentive to things like the climate transition — those long-term factors are still there. And there’s still a lot of capital interested in this in this space.

Loney: Because we have Earth Day coming up, let me have you focus on the environmental side of where things stand.

Henisz: Earth Day doesn’t change the importance of the climate transition or of climate information, right? The fact that we’re already at or exceeding a 1.5-degree warming scenario, that highlights the importance of the E.  E, S, and G are all factors that have been left out. E is probably the easiest to measure and the most visible when we look out our windows, when we walk to work, or when we face some of these extreme storms we’re having.

I just jotted down some statistics before we started. For 25 years, from 1980 to 2004, we averaged $9 billion insured climate losses a year globally. From 2004 to 2020, it went up to $23 billion. From 2020 to 2024, $27 billion. Last year we had $28 billion. We’re seeing extreme weather. We’re seeing extreme storms. That’s not changing, and that’s why there’s so much attentiveness to the climate transition. Earth Day draws our attention to it. It draws our focus on it. But 27 times last year, we read about a billion-dollar loss caused by extreme weather. That should be keeping our attention well beyond Earth Day.

Loney: If you’re talking about those types of losses in the scope of a company and their bottom line, things would change real fast.

Henisz: They are affecting companies and bottom lines. We’re seeing more worker accidents on days of extreme weather, when wet bulb temperatures get up over 100 or 110. We are seeing more companies whose supply chains are being disrupted because you can’t access a canal, or your facilities have been flooded by a typhoon in Asia. So, companies are being affected.

But you’re right, Dan, that it’s not easy to fix climate change for any one company. It’s impossible, actually. It takes companies and countries working together. And that is harder today, and that is a real problem with the current policy environment. It’s much harder to get the coordinated action among governments, companies, across industries, to navigate and achieve a slowing down of the global warming that we’re experiencing.

Loney: In the U.S., does the focus go more on the state and local level in terms of trying to make some effective policy change? Because at times the federal level becomes too much of a mess for a lot of people.

Henisz: We are seeing some leadership on some of these issues. States like California and New York are pushing forward. But we’re also seeing some states moving in the opposite direction and saying, “You know what? You can’t include this information. If you include this information, you’re in violation of state law and state policies.” We’re seeing that more in states like Texas and Florida. States having the right to go their own way, you’ll see more extremes on both sides.

There’s some concern in the red states, where the state banking associations and some investors are saying, “Wait a minute, why can’t we include this information? This is affecting our state, too.” Think about the state of Florida. If you couldn’t incorporate environmental or climate-related information into your investments in real estate, that wouldn’t be really smart real estate investing, if you didn’t take into account sea level rise and hurricanes that are hitting the state of Florida. That same argument applies more broadly to state of Florida pension owners. I think we’re seeing pushback among asset owners about whether it’s a good idea to rule this out, so there is more variation at the state level. It’s not all good. It’s not all in a way that’s more informed than the national policy. Some states are actually being more retrograde and restrictive than even the federal government.

Loney: How do you look at the future around ESG?

Henisz: I think in the long term, I’m confident that we’ll better price financially material environmental, social, and governance factors. The financial incentives to do so and to avoid ignoring it are just too great. But over what time horizon, and what does it look like from here to that?

What I’m really concerned about is, in the short term, firms are going quiet. Even the firms that are doing the work or trying to figure this out aren’t sharing as much. They’re not talking as much about what they’re doing, which makes it harder to understand who are the leaders? Who do I want to invest in? Or who are the leaders in adapting and being resilient, and who’s coming up with the new technologies? There’s just much less sharing of information. Also, there’s some sense that if we do share, if we do go out and talk about what we’re doing and how we’re trying to make progress, we might be punished. We might be targeted for some sort of political retribution.

That means in the short term, especially in the United States, we’re going to move much less quickly towards investing in the kinds of technologies that could enable the climate transition. Because we’re already in a 1.5-degree scenario, and we’re rapidly accelerating that, the consequences of waiting, the consequences of delay, are going to be many more of those billion-dollar losses that I described earlier. You go from $27 billion a year to $30 billion to $35 billion to $40 billion a year. We can’t predict exactly what, but the trend is pretty clear. And that’s going to have real consequences.

I think eventually we’ll get there. The financial reasons to do so are really strong. But it may be a much rockier next five to 10 to 20 years before we do that. And it’s not going to be as coordinated. As you mentioned, different states are enacting different policies. The European Union is doing one thing. The U.S. is doing the opposite. Asia is working on a set of policies. What is China doing? China is continuing to double down in electric vehicles and pollution reduction. We might cede some of the potential leadership in the space to the Chinese economies and the Chinese peer companies. Is that in the long-term interest of the U.S. and its competitive advantage? I don’t think so.