A 10-K Disclosure First: ‘Anti-ESG’ 

Congratulations to the Carlyle Group, which apparently is the first company ever to disclose in an SEC filing that conservatives’ displeasure with corporate ESG efforts is a material risk to corporate performance.

Carlyle, a publicly traded investment company with more than $370 billion in assets under management, included “anti-ESG sentiment” as a risk factor in the 10-K report that the company filed last week. I searched corporate filings for any previous mention of “anti-ESG” by anyone, and came up dry. This is the first instance.

Specifically, the company said: 

Anti-ESG sentiment has gained momentum across the United States, with several states having enacted or proposed “anti-ESG” policies, legislation or issued related legal opinions… If investors subject to such legislation viewed our funds or ESG practices, including our climate-related goals and commitments, as being in contradiction of such “anti-ESG” policies, legislation or legal opinions, such investors may not invest in our funds, our ability to maintain the size of our funds could be impaired, and it could negatively affect the price of our common stock.

What are those anti-ESG policies, exactly? Typically they’re state laws that target financial institutions that “boycott” or “discriminate against” (Carlyle’s use of quote marks, not mine) companies in certain industries, such as fossil fuels and mining. The laws ban state agencies from doing business with those firms, including a ban on state pension plans investing their assets with those firms. State investment managers are only allowed to make investment decisions based on financial performance, nothing else.

The people pushing these anti-ESG policies are, of course, Republicans. Florida just proposed anti-ESG legislation earlier this week, after many months of Gov. Ron DeSantis fulminating about woke-ism run amok in Corporate America, whatever that means. Texas enacted a law two years ago that bars financial firms with ESG policies focused on climate change and firearms from underwriting bonds issued in the state. According to an article in the Financial Times this week, nearly 50 anti-ESG bills have been introduced across the United States this year. 

Do Anti-ESG Policies Actually Work?

Well, no, but when have logic and common sense ever stopped political fads? 

Indeed, the anti-anti-ESG forces have recently mounted a counter-offensive, pointing out that when states curtail the pool of financial firms with which they might do business, those states’ financial costs go up. One research firm found that among six states that already have anti-ESG restrictions in place, the cost of their bond issues in 2022 rose somewhere between $264 million to $708 million. (See Figure 1, below.) Costs that taxpayers in those states paid, mind you.

Anyway, what does all this have to do with corporate governance? A few things.

First, it’s entirely possible that the anti-ESG crowd will try to extend their jihad beyond the financial sector, to score political points with their base. We already see hints of this with, again, Ron DeSantis, who is now threatening to cancel all advanced placement courses in Florida high schools because he disagrees with the AP course on African-American history. It’s not a big leap to imagine that he might next start barring companies from bidding on state contracts or denying them operating licenses if they disclose that they care about ESG. 

Large companies trying to placate numerous customer bases will need to anticipate such political pressures. I don’t know that any easy answer exists, because by placating the anti-ESG groups you’re alienating other groups who do believe ESG issues are a valid corporate concern. 

Indeed, it’s quite possible that by submitting to anti-ESG forces, an investment firm might actually violate its fiduciary duties. If your goal is to achieve the best return on investment, at least part of that success depends on finding a low-cost provider of financial services. When you, the investment firm, cut ties with the largest and most diverse providers, you’re likely to see your costs rise — which is what that consulting firm found in the research mentioned above. 

Moreover, there’s evidence to suggest that ESG-focused funds lead to higher returns over the long term, and also evidence to suggest that they don’t. Although in both instances, ESG-focused funds are not the same as a company that considers ESG factors in its strategic growth plans. 

At this point, it seems like Carlyle Group has handled this mess the smart way: by disclosing it to investors, so they can make their own decisions about who’s right, who’s wrong, and who’s nuts. 

Right now Carlyle is the only filer making such a disclosure. Something tells me it won’t be the last.