ESG initiatives should avoid unfavourable reactions by pursuing substance over form

Duncan Sankey

Portfolio director and head of credit research Cheyne Capital

Bud Light saw its US market collapse because of a boycott by conservatives

By any financial measure, the collaboration of trans activist Dylan Mulvaney with Bud Light hurt the brand. What was formerly America’s best-selling beer saw its market share collapse — from over 35% in May 2023 to around 9% in June — because of a boycott by US conservatives after a 60-second TikTok video aired of Mulvaney drinking it.

However, to characterise the episode merely as a reactionary response to a company’s legitimate attempt to promote diversity lacks nuance. The episode was complex — and it has profound implications for how we should think about environmental, social and corporate governance.

Conventional wisdom suggests companies adopting ESG practices make themselves more sustainable, thereby reducing operating risk, enhancing long-term performance and boosting investor returns. The evidence is supportive, but not compelling. When adjusted for fees, fund size, style and region, the differences in performance between ESG and non-ESG funds may not be statistically significant; at the very least there is more work to be done.

Long-term benefits undermined

Moreover, there is a feedback loop that needs consideration. An unfavourable public reaction to an ESG initiative that negatively impacts the reception of the underlying product may undermine the notion that ESG delivers more favourable long-term outcomes.

This quandary is not only the preserve of mass brewers. Adoption of electric vehicles in the US has not met with the expectations of the auto manufacturers, despite the extension of tax credits for new EV purchases and new tax credits for used EVs. Doubtless this relates in part to affordability and a woefully underdeveloped charging infrastructure. However, Ford chair Bill Ford cites another challenge. EVs have become weaponised to serve the culture wars, with some people (and states) conceptualising them as instruments of government coercion, akin to their perception of covid-19 vaccines as something that is “being shoved down our throats by the government”.

The Detroit Three and Tesla will together have invested around $125bn in EVs by 2025. As yet, only Tesla makes money from them. Ford, which targets an 8% EV ebit margin by 2026, reported a -75% margin in its EV operations as of the latest quarter. If negative perception of ESG stymies EV adoption, a major ESG initiative will have impaired the sustainability of the auto sector.

You don’t need to lurk in the chatrooms of the libertarian right to acknowledge the democratic deficit implicit in ESG. Initiatives often spring from the C-suite, the Orwellian-sounding committees they appoint, or shareholder activist groups. Take the case of exclusion lists: many ESG funds exclude companies involved in tobacco and gambling. For the most part, while both activities are circumscribed by regulation, they are not outlawed by any democratic assembly. Corporate executives and shareholders risk usurping popular authority. Even an initiative led by government, if it lacks broad-based public support, risks failure.

The public also has a well-tuned ear for inauthenticity and expediency. Returning to our initial example, was it not the instrumentality implicit in the use of Dylan Mulvaney to promote a brand, rather than the celebration of her transition, that provoked a revolt among Bud Light drinkers?

Every claim by a major greenhouse gas emitter that it is protecting the world’s future (such as that in a Lufthansa advert ruled misleading by the UK Advertising Standards Authority) stretches public credulity. The latitude granted to — and exploited by — managers of Article 8/9 funds under the Sustainable Finance Disclosure Regulation, undermines investor confidence in the integrity of ESG (especially when many were subsequently downgraded). Green and sustainability-linked bonds that set insufficiently challenging threshold tests or nugatory penalties for missing them have much the same effect.

Ensuring ESG initiatives are sustainable

If ESG initiatives are not to exert perverse effects on the sustainability of companies that advance them, they must promote goals shared by the public at large and legislated by their political representatives. They must also prioritise substance over form and be subject to rigorous measurement and enforcement. Anything else is just small beer.

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