"Business leaders can't avoid decisions that have direct social and environmental impacts, some of which are highly contested. This is where the 'G' of 'ESG' really becomes important--and challenging. Executives are being put into the position of needing to make politically-contentious environmental and social decisions." - Joshua Nunziato
At CESR, we focus on helping shape future business leaders who have the skills to consider Environmental sustainability, Social impact and Governance (ESG) as a core component of corporate strategy. The past few weeks have shown why that is so important as the US Supreme Court (SCOTUS) has issued judgements in two cases, West Virginia v. EPA and Dobbs v. Jackson Women’s Health Organization.
West Virginia v EPA
Reguating Emissions vs. Reporting Standards
Despite the SCOTUS ruling last week limiting the authority of the EPA to regulate greenhouse gas emissions, we are seeing a continued push for increased transparency around carbon reporting. Last week, the European Parliament voted to approve the Corporate Sustainability Reporting Directive (CSRD)’s work to expand reporting to cover an additional 40,000 companies, a nearly 4x increase.
Proposed SEC rules currently under review in the US also focus on disclosure, not target setting or regulation. While they will certainly be headed for a legal challenge, some believe their limited focus is likely to survive in court.
“Because climate risk is widely recognized as being inseparable from financial risk, the proposed SEC rule may be seen by courts as falling squarely within the purview of the SEC's mandate to ensure corporate transparency, thereby enabling informed decision-making by investors,” Joshua Nunziato, Assistant Teaching Professor, Social Responsibility and Sustainability says. “In other words: the West Virginia decision does not necessarily doom the new SEC climate disclosure rule.”
In the meantime, large audit and consulting firms like EY and Deloitte are investing in sustainability and ESG teams, betting that demand for strategy, data collection and reporting will continue to grow.
The Clean Energy Transition is not Slowing Down
Additionally, companies that had begun transitioning away from coal under the now defunct Clean Power Plan are unlikely to change direction. Nunziato believes businesses will continue to do so for market reasons. “The exponential decrease in the per unit cost of solar photovoltaic cells increases the speed with which new non-renewable power plants will become stranded assets,” he argues.
The Sierra Club has documented the closing of 357 US coal-fired power plants, with 173 remaining in production and the Environmental Integrity Project has calculated that US coal production fell to 21.8% in 2022, exceeding the target set by the Clean Power Plan of 27%. The reasons for this have been well documented by Leeds faculty Jeff York and David Drake in their paper, Kicking Ash: Who (or What) is Winning the “War on Coal”?.
All of this suggests there is increasing understanding that businesses have a responsibility to a low carbon future at the same time that the demand for renewable energy to increase capacity, and ultimately offset fossil fuels, is on the rise.
Dobbs v. Jackson Women’s Health Organization
Companies Respond to Stakeholders
After the leaked draft of the Dobbs v. Jackson Women’s Health Organization decision earlier in the year, the public has been bracing for SCOTUS’ overturning of the 50 year old Roe v. Wade case which legalized the right to access abortion in the United States. Quickly after the draft was made public, companies began to announce new policies that protect their employees’ access to comprehensive women’s health care. A number have explicitly linked these announcements to their values, their commitments to their workforce, and to their business strategy.
Yelp, one of the first to make this kind of policy announcement, has said that their interest is both “safeguarding employees’ right to health care, but [also] what it means as a brand to stand up for this right.”
Levis' statement calls attention to the strategic business importance of women’s access to health care and reads "access to reproductive health care, including abortion, has been a critical factor to the workplace gains and contributions women have made over the past 50 years.”
Conde Nast CEO Roger Lynch said, in a memo published in part by NPR, “the most powerful way for us to respond to what’s happening right now is through our brands. . . Our values are clear in the content and journalism we produce.”
Corporate Value Statements have Measurable Impacts
Sabrina Volpone, associate professor in the Organizational Leadership division at Leeds, recently presented research at Purdue University’s Dismantling Bias conference series (with coauthors at the University of Texas at Arlington and Wake University) analyzing the statements organizations and leaders made in response to racial social justice in early 2020. Vopone says “making such value statements can have a positive impact on a number of organization-focused outcomes, such as the commitment that employees have to addressing diversity in their own workplaces.”
However, Volpone notes that her research also underscores the importance of companies behaving consistently and not sending mixed messages that can undermine their sincerity and stakeholder trust. For example, she notes, “if the organization makes a social justice-related values statement, yet their political donations signal that they support values that are at odds with that statement, what does that say to internal and external stakeholders?” In such cases, Volpone cautions, “the impact of value statements may not have the intended impact that the organization thinks that it will.”
ESG is a Strategic Imperative
While greenhouse gas emissions and abortion access are in some ways very different issues, they are both areas where businesses must think about how their environmental, social and ethical decision making impacts their business strategy and viability. Increasingly, businesses understand that doing good can be a catalyst for doing well. At the same time, individual companies are experiencing political pushback for their corporate policies. For example, Disney is at odds with Ron DeSantis, and Citibank has had its contract with the federal government brought up for review. These conflicts underscore the way in which business decisions that have social and environmental impacts are often inherently political.
Investing in pro-social and environmentally sustainable practices builds loyalty and a sense of belonging among employees, reduces turnover and burnout, and enhances operating consistency and predictability. It also appeals to consumers who want to view their purchasing behavior as participating in a larger ecosystem that lifts individuals and communities up through economic activity. Moreover, by tying ESG to sustainability, businesses can consider the positive impacts they have as part of their business value, set goals, and use those to help drive innovation and market leadership.
For Nunziato, the question is whether these benefits are enough to confer legitimacy on executives who need to make tough decisions in an uncertain political and regulatory environment.
How will executives persuade the relevant stakeholder groups that they do, in fact, have political legitimacy to make the environmental and social decisions they can't avoid facing? And, given that business is inevitably political, can we--should we--make it more directly democratic?
It is likely that individual states will enact stricter abortion laws over the next several months that will impact businesses and there seems to be a push from some political leaders to resurrect fossil fuels, or even to make the transition to a cleaner grid more expensive and complicated. It is unclear how companies will navigate these challenges if they become destabilizing to their financials. We will be watching how they will assess the risks of not aligning with political pressures, compared with the risks of compromising on ESG commitments.
You can read Leeds’ faculty published research which is helping to drive our understanding of these issues forward on our Faculty Excellence page.