After years of applying the progressive environmental, social, and governance (ESG) ideological framework to their corporations, executives appear to now be realizing that these programs could be driving their companies into a legal and financial wall.
The past year has seen a growing list of Fortune 500 companies announcing that they are dropping race- and gender-based programs for their employees and pulling out of global net zero climate clubs.
Companies that have announced they are canceling or dialing back their diversity, equity, and inclusion (DEI) programs include Meta, Walmart, Ford, McDonald’s, Harley-Davidson, John Deere, Tractor Supply Company, Lowe’s, Molson Coors, Nissan, Toyota, and Stanley Black & Decker.
On Jan. 13, the Net Zero Asset Managers initiative (NZAMi) announced that it would suspend its activities after investor giant BlackRock announced its withdrawal from the club on Jan. 9. These departures followed in the wake of half of the members of the Net-Zero Insurance Alliance quitting that organization in 2023.
This has led many to conclude that the ESG movement is rapidly coming to an end.
“ESG and DEI are both on death watch,” Daniel Cameron, former Kentucky attorney general and current CEO of the nonprofit 1792 Exchange, told The Epoch Times.
“I think it’s because companies are realizing that a lot of the country just want our corporate community to focus on creating and developing great products and providing great service, rather than pushing or preaching a partisan agenda,” he said.
Republican victories in the November 2024 elections will likely spark more defections from the progressive corporate movement.
“The election of Donald Trump put backers of ESG on notice, and I believe the recent departure by several major banks and asset managers from the U.N.’s anti-fossil fuel cartel confirms that the broader ESG movement is on life-support,” Rep. Riley Moore (R-W.Va.) told The Epoch Times.
In his former role as state treasurer of West Virginia, Moore was among the first to divest state funds from BlackRock over what he charged was the firm’s support for ESG policies.
Is ESG Good for Companies?
The ESG ideology originated at the United Nations in 2004 as a way to get private companies on board with progressive climate and social goals known as the U.N.’s “Sustainable Development Goals.”ESG, together with its DEI component, were hailed by advocates as essential risk-management tools that were not only good for society, but also good for companies’ bottom lines.
However, at the same hearing, Lori Heinel, chief investment officer for State Street Global Advisors, said, “I have no evidence that this is good for returns in any time frame; in fact, we’ve seen the evidence to be quite contrary.”
Ernst & Young, a global management consultancy, has argued that “managing ESG risks has become a compulsory exercise,” and its 2023 C-suite Insights Survey reported that 90 percent of companies had ESG programs in place, with corporate boards and chief sustainability officers directing and monitoring their progress.
A 2022 survey by the Harvard Business Review found that two-thirds of U.S. companies had a race- or gender-based DEI program in place. Companies including Wells Fargo, JPMorgan Chase, Delta Airlines, Ralph Lauren, and Estee Lauder implemented race-based hiring and promotion policies, and United Airlines announced in 2021 that half of its new pilot trainees would be women or “people of color.”
McKinsey & Company, a management consultancy, stated in 2023 that companies that employed more women or were more racially diverse were “significantly more likely to financially outperform.” However, a subsequent analysis of the performance of companies in the S&P 500 index, published in 2024 by Econ Journal Watch, found no statistically significant relationship between companies’ racial diversity and their sales, profits, or equity performance.
That latter report, written by accounting professors Jeremiah Green at Texas A&M University and John Hand at the University of North Carolina, stated that McKinsey’s methodology was “erroneous [and] should not be relied on to support the view that U.S. publicly traded firms can expect to deliver improved financial performance if they increase the racial/ethnic diversity of their executives.”
According to many critics, ESG and DEI were never much more than a corporate fad, which has now fallen out of fashion.
From a Movement to an Industry
This is a dramatic decline for a movement that morphed into an industry, and which only a few years ago dominated the corporate landscape. The ESG juggernaut included asset managers, consultants, rating agencies, accountants, proxy agents who advised shareholders and pension fund managers about how to vote on corporate ballots, and numerous climate clubs to coordinate efforts.But even this was only the tip of the iceberg.
The world’s savings and investments are heavily concentrated in the hands of just a few fund managers, the largest of which, called the “Big Three,” are BlackRock, State Street, and Vanguard, which collectively manage more than $20 trillion in assets largely through their index funds.
A 2022 study by Lucian A. Bebchuk of Harvard Law School and Scott Hirst of Boston University found that “the Big Three collectively held a median stake of 21.9 percent in S&P 500 companies, which represented a proportion of 24.9 percent of the votes cast at the annual meetings of those companies.”
Added to this are the United States’ largest municipal retirement funds, including CalPERS, CalSTRS, and New York City and state pension funds, which have also pressured companies to embrace ESG ideology.
These fund managers joined U.N.-sponsored net zero alliances, such as NZAMi and the Net-Zero Banking Alliance—which pledged to reduce the use of fossil fuels—as well as other activist organizations such as Climate Action 100+.
Founded in 2017, Climate Action 100+ describes itself as “an investor-led initiative to ensure the world’s largest corporate greenhouse gas emitters take appropriate action on climate change,” and it stated in its 2024 annual report that it had an 80 percent success rate in persuading companies to commit to reaching net zero emissions by 2050.
The Biden administration also threw its weight behind the ESG movement. In 2021, President Joe Biden signed an executive order to “advance diversity, equity, inclusion, and accessibility in all parts of the Federal workforce.”
In 2022, the U.S. Labor Department altered its rules to allow asset managers of private Employee Retirement Income Security Act (ERISA) pensions to consider “climate change and other environmental, social, and governance factors” when investing pension money. Previously, under the first Trump administration, ERISA fund managers could only consider pecuniary factors that would maximize returns to pensioners.
In addition, the SEC in March 2024 implemented what became known as the “green accounting” rule, which required all listed companies to audit and document their “climate-related risks,” their carbon dioxide emissions, and their strategies for reducing them.
‘The Beginning of the End’
President-elect Donald Trump has pledged to end DEI throughout the federal government and in federally funded colleges, and in anticipation, the FBI reportedly closed its Office of Diversity and Inclusion in December 2024. The incoming administration is also likely to reverse the SEC’s green accounting rule and reinstate its previous policies that ban non-pecuniary investing of ERISA pension funds.But according to ESG critics, the ideology still has life in it.
“It’s the beginning of the end,” Will Hild, executive director of Consumers’ Research, told The Epoch Times. “The momentum has shifted and I don’t see it coming back, but there’s still a lot of work to do.
“Even with BlackRock leaving Net Zero Asset Managers, and [NZAMi] shutting down operations, you still have a number of these firms, including BlackRock, who have not repudiated their firm’s individual commitment to pushing net zero.”
Many conservative asset managers concur.
“The fight to root out ESG/DEI from corporate America is just beginning,” Tim Schwarzenberger, a portfolio manager at Inspire Investing, told The Epoch Times. “There have been a relatively small number of companies that have made commitments to end their problematic DEI programs, leaving numerous companies with entrenched policies.
“Hopefully, we will look back and see the Biden administration as the high-water mark,” he said.
Companies that have left the ESG fold have faced sharp criticism for doing so.
“Capitulating to climate denier politicians undermines asset managers’ fiduciary duty to mitigate the growing risks that climate change poses to investors’ life savings,” Ben Cushing, campaign director for the Sierra Club’s Fossil-Free Finance campaign, stated after BlackRock quit NZAMi.
And calling NZAMi’s suspension of operations a “backwards step,” Lewis Johnston, director of policy at ShareAction, stated that “Climate risk is financial risk. ... Collaboration is critical for addressing this global challenge.”
When BlackRock, JPMorgan Chase, and State Street left Climate Action 100+ in 2023, New York City Comptroller Brad Lander said the three companies were “caving to climate deniers.” He warned that he would “consider ... options for the management of ... public market investments,” threatening to shift the city’s funds to more progressive asset managers.
Legal Landmines
With pressure coming from both left and right, one potentially overriding concern for corporate executives and fund managers is the legal liability created by ESG initiatives.“Companies face customer and employee backlash, financial liability, and legal and regulatory risks,” Schwarzenberger said.
“We already saw the customer and employee backlash happen with companies like Tractor Supply, John Deere, Harley-Davidson, etc. Now attention is being placed on legal and regulatory risks, especially with the American Airlines ruling that its 401(k) plans violate ERISA fiduciary duties.”
At the height of the ESG movement, many executives acted in lockstep, seemingly believing that “safety in numbers” shielded them from legal action, analysts said. But with every company that steps away from ESG ideology, those that remain committed are more exposed to employee and investor lawsuits and enforcement actions from federal and state officials, according to legal experts.
“The idea that, ‘If we all ignore the law we’re going to be okay,’ has failed many times in the past, and it will continue to fail in the future,” Tennessee Attorney General Jonathan Skrmetti told The Epoch Times. “The law is the law, and all it takes is a few companies defecting, and then you can’t say ‘everybody’s doing it’ anymore.”
He said every company that abandons its ESG or DEI policies “makes it harder for the remaining companies to toe the line.”
In December 2023, Skrmetti brought a consumer-protection suit against BlackRock, alleging that the firm had misled Tennessee consumers regarding the extent to which ESG factors affected its investment strategies.
According to a survey of 600 corporate lawyers by Baker McKenzie, ESG-related lawsuits were seen as the biggest litigation risk to their organizations in 2024 (up from second place in 2023), although it is unclear how many of those suits were in favor of ESG initiatives or against them.
The legal risks include violation of civil rights laws, antitrust laws, and consumer protection laws, experts said.
The letter warned that “if your company previously resorted to racial preferences or naked quotas to offset its bigotry, that discriminatory path is now definitively closed.”
Corporate attorneys are beginning to push companies to acknowledge and disclose these risks to investors. In its September 2023 10-K filing with the SEC, for example, The Walt Disney Company listed among its risk factors the fact that “consumers’ perceptions of [Disney’s] position on matters of public interest, including ... efforts to achieve certain ... environmental and social goals, often differ widely and present risks to [Disney’s] reputation and brands.”
This disclosure followed a significant decline in Disney’s sales and share price following the company’s campaign against a Florida parents’ rights law that barred teachers in grades K–3 from discussing sexual topics with students, as well as revelations that company producers were routinely putting controversial sexual themes into children’s content.
And in 2023, a white Starbucks employee was awarded $25 million when the company was found to have fired her because of her race.
Companies put themselves at risk with race-based training and other policies, as these practices open them up to employee lawsuits for creating a hostile work environment, Hild said.
“Where were their compliance attorneys on this stuff?” he said. “I think it raises the question of whether a lot of these companies need to take a look at their compliance departments and have some firings on that front.”
Anticipating that the Trump administration will take a tougher approach to enforcing civil rights and antitrust laws regarding ESG, many companies are now racing to get their policies in line with these laws.
“A lot of companies got way out over their skis on this, but the law hasn’t changed,” Skrmetti said. “You’re going to see a lot of litigation going forward, and that’s why I think you’re seeing a lot of companies move very, very quickly to try to get on the right side of the law before the Trump administration begins enforcing these laws that have been on the books for a very long time.
“We are a country of individual Americans, and when you put people in buckets based on something as trivial as the color of their skin and treat some people differently than others, it’s evil,” he said.
