At last week’s Reuters IMPACT 2023 conference, one thing was on everyone’s mind: ESG. Environmental, Social and Governance (ESG) issues are growing concerns for businesses around the world, particularly in the leadup to implementation of the EU’s Corporate Sustainability Reporting Directive (CSRD) that will require large companies to disclose more emissions and pollution data than ever.

An attendee could be forgiven for thinking that everyone in the corporate world was committed to decreasing emissions and moving towards a sustainable future. In an interview with PBI at the conference, consultant Mark Chadwick described the move to net zero as more akin to a “mandate” than a choice. He cited consumer, regulatory and shareholder pressure as key factors.

Whilst this is true in many markets, North America and particularly the United States have had serious backlash against these policies. Last year Texas banned 10 financial firms from entering contracts with the state government, claiming they “boycott” the fossil fuels industry. A law passed the year before prevents state entities from contracting with companies that have cut ties with the oil and gas sector. Earlier this year Florida governor and presidential candidate Ron DeSantis banned state officials from investing public money to achieve ESG goals and prohibited the sale of ESG bonds.

These challenges are particularly acute in the US, but the anti-ESG movement has spilled over into Canada, where behavioural consultancy firm BEworks is based. The director of its research institute, David Lewis, thinks the culture war is causing businesses to recoil, at least in public: “They [businesses] don’t want to make the big point of being in favour of ESG, although they definitely are. Even on the regulatory side, they’re very responsive to the whole climate change reporting. The International Sustainability Standards Board (ISSB) has come out with new guidelines [and] companies are not opposing that.”

“They’re perfectly willing, but they’re not going to put billboards up saying, Hey, we comply with ISSB, because it’s a no win in Canada. In the US, it’s even worse. I mean, it’s actively damaging in the US; you’re essentially staking out an image for yourself that’s highly aligned with one political pole against the other. So they are staying out of the fray.”

Form vs. Function

Studies show that most Americans support ESG measures, so what’s behind the backlash? As a behavioural economist, Lewis thinks the answer can be found by looking at people’s personalities. “You’ll always have an extreme. There’s, you know, a nonzero proportion of the population that’s firmly convinced the earth is flat. You’re never going to convince them otherwise. So there’s people who simply don’t respond to facts and part of it is a trait.”

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Unlike attitudes, which can be altered, traits tend to be more fixed, he tells PBI. “A trait is something that is far more difficult to change and there’s a trait around favouring facts over beliefs. You can present a flat earther with the fact that the earth in fact, is not flat and they’re not going to change their belief because they have a trait that says they favour their own beliefs over evidence or facts […] ESG is the same thing. Companies that want to increase receptivity to it can’t focus on facts.”

Applying this to the world of investment, Lewis advises clients to view the value question through the lenses of functional, emotional and expressive benefits. “The functional benefits of investing are my money will grow and I’ll be able to retire and I’ll be able to maintain my lifestyle. That’s a functional benefit, very utilitarian. But a lot of our decision making isn’t necessarily focused on functional benefits; there’s emotional and expressive benefits, for example. Emotional is how does this make me feel? Happy, sad, okay. Then there’s also expressive benefits: how can I use this to express who I am and what I believe in and what I think is important?. Those are as powerful as functional benefits.”

This runs contrary to the way many firms are currently trying to sell green investments, and even the conscious view of many investors themselves: “if you look at the benefits that people would perceive when they think of their pension, or they think of their investment, there’s functional benefits, you know, what’s the covariance with the other investments in my portfolio? Is this going to give me a better risk adjusted return? The average portfolio or pension investor or even self-directed investor doesn’t really think that much. For them, it’s a scale, is a return good or bad? It’s almost binary.”

Islands and dinner parties

Ultimately, this thinking can only take people so far. Lewis went on to explain that, “I want to go to the dinner party Saturday night and brag to all my friends that I’ve invested in ESG funds, aren’t I great, I’m saving the planet, and we can sort of laugh at that but you have to realise those are very powerful motivators in decision making.” Aileen Getty, the billionaire climate activist and granddaughter of oil tycoon J. Paul Getty comes to mind.

This won’t work on everyone, though. Investor Peter Thiel, for instance, has opted to shirk responsibility for the planet and instead buy a plot of land nearing the size of Lower Manhattan in New Zealand, allegedly as a getaway for when the climate crisis destroys civilisation. Even Elon Musk, founder of dominant electric car manufacturer Tesla, has posted climate sceptical tweets on X, the social network formally known as Twitter, of which he is the (reluctant) owner.

These people are a fringe, but one with an outsized grip on power due to the capital they hold. Dr. Lewis remains hopeful that the majority of even the super-rich can be persuaded (though he was careful not to mention any names). “Let’s imagine Mary, an extremely wealthy software developer in Silicon Valley who has enough money to buy an island. I would argue that even she would have expressive and emotional benefits associated. She probably cares less than someone living in a floodplain area or someone in a lower socio-economic class, whose house just got destroyed by a hurricane in Florida, but that doesn’t mean she doesn’t care. Appeal to that side.”

“The vast majority is in the middle. That’s who you really have to work on. The low hanging fruit is really in the average person who’s open to convincing, but you need a better communication strategy. And that communication strategy really has to focus on the non-rational rather than the rational.”

Dr. David Lewis, President of the BEworks Research Institute

Equal and Opposite

Convincing people is a slow process, and waiting for companies to do it doubly so. Government and international regulation also plays a key role in bringing about change, and standards are far behind where they could be. Lewis warns of relying too heavily on top down intervention, however, explaining that “there’s something called reactants where people will willingly do things, but if you tell them that they have to do it they’ll actually do the opposite just to maintain personal agency. It sounds childish, but humans are. So I would worry going too extreme on [regulation] and creating reactants.”

“Sadly, it’s probably going to be highly effective for the worst perpetrators, but, you know, you do have to worry about backlash. It would be an interesting social experiment, because I think there’s a broad silent majority in the middle that worry that about climate change and are anxious about the world we’re passing on to our children, but they’re pretty much sleeping. So you need to wake those people up before you go too far on the prohibitions, because you’ll definitely wake up the very vocal, very militant people.”

Lewis’ perspective on humanity is realist, but by no means pessimistic. Despite acknowledging the sad reality that vocal minorities often dominate the conversation on major issues, he is quick to defend the average person from more elitest claims of ignorance. Explaining the Dunning-Kruger effect, a phenomenon in which people who know very little about a subject believe themselves to be more knowledgeable than people who know more, he argues that the common formulation is unfair, “the less you know about something, the more you think you know is sort of a negative way to express it. A more positive way is we’re unaware of our own ignorance. We don’t know what we don’t know. Really, those are two different statements.”

Using the example of those on opposite sides of the abortion debate in Ireland, he talked about an experiment in which two groups of people on extreme opposite ends – one very pro-life, the other very pro-choice – were brought together and made to argue the opposite to each other. By the end, both sides had moderated their viewpoints. Climate change, he suggests, will require something similar.

More Haste, Less Speed

Discussions like this may be vital, but they are also time consuming. The climate crisis is an ongoing and worsening issue that without robust and rapid action poses extreme risk to human life – and the global financial system. When asked how to reconcile the need for change and the need for consensus, Lewis warned not to confuse means and ends: “Your ultimate ends, in fact, are not speed. You can say we’re running out of time, which we are, but acting in a way that doesn’t achieve the desired end results in favour of speed means that you’ve chosen a different end result. You’ve chosen speed. If speed is not going to be effective, and so far it hasn’t been, I’d say focus more on getting it right as opposed to getting it done quickly.”

“My objective is in actively moving to reduce climate change, and I firmly believe in the benefits of doing so, but if you try to move too quickly, it could be counterproductive. Yes, there’s urgency. But there’s two parts to that, urgency and importance and getting the right result is more important than getting it done quickly. Slow down, get it right.”