Why You’re Probably Hearing Less About Corporate Climate Initiatives

In the last week of April, around three in 10 voting shareholders at Goldman Sachs, Wells Fargo and Bank of America backed resolutions demanding that the banks explain how they were dealing with climate change. In the same week, Morningstar, the data provider, said that the first quarter of 2023 had been the weakest for the launch of new “sustainable” funds in three years, partly because of investor sensitivity to accusations of “greenwashing,” or the misrepresentation of climate initiatives. This followed a congressional measure to prevent retirement plan managers from even considering social and climate issues in their investments (which President Biden vetoed).

How are business leaders to deal with the bewildering signals around E.S.G. — short for environmental, social and governance factors? On one side, prominent investors are calling on them to show they take climate change seriously. On the other, campaigners against “woke capitalism” are pushing for chief executives to focus solely on making money for their shareholders.

It’s not a new dilemma. Chief executives have been debating the proper role of corporations — to make profits for shareholders or to serve society at large? — for more than a century.

The Michigan Supreme Court considered the question in 1919, when the Dodge brothers, as shareholders in the Ford Motor Company, complained that Henry Ford was diverting profits into expanding the business and lowering the price of cars, rather than paying dividends. More than 50 years before Milton Friedman would famously declare that an executive’s responsibility was to make “as much money as possible,” Ford argued the opposite, saying the purpose of a corporation was to increase employment and pay good wages, and only incidentally to make money. The court ruled in favor of the Dodges.

Some business leaders sided with Ford. Owen Young, the chairman of General Electric, said in the 1920s that, in addition to paying a “fair rate of return,” corporations had an obligation to labor, customers and the public. Jack Welch, a future General Electric leader, became a champion of shareholder value. But he later told the Financial Times, in the wake of the 2008 financial crisis, that shareholder value was actually “the dumbest idea in the world” and that “your main constituencies are your employees, your customers and your products.”

The conflict between creating value for shareholders and serving a wider set of stakeholders tends to become particularly acute during societal shifts, says Jennifer Howard-Grenville, a professor at the University of Cambridge’s Judge Business School. The 2008 financial crisis was one. The climate crisis, she says, is another.

Competing Demands

How can chief executives balance climate reality with the pressures from the anti-woke crowd? Some business leaders have responded by denying there is any contradiction — provided you take the long view. Paul Polman, the chief executive of Unilever from 2009 to 2018, insisted the consumer group’s future was inextricably linked to the planet’s. Unilever had been around for more than 100 years, he said in a speech the year after his appointment. To continue to exist for centuries more it needed shareholders who looked far ahead, too. To those who didn’t, Mr. Polman said, “don’t put your money in our company.”

Which was fine, until a 2017 bid from Kraft Heinz, later withdrawn, forced Mr. Polman into an immediate shoring up of Unilever’s stock price through cost cutting, dividend increases and a share buyback. The problem with Polman’s strategy is that many investors and lenders want their money, if not now, then soon. As Stuart Kirk, the former global head of responsible investment at HSBC Asset Management, said in a speech last year that led to his departure: “At a big bank like ours, at HSBC, what do people think the average loan length is? It’s six years. What happens to the planet in year seven is actually irrelevant to our loan book.”

Georg Kell, the chairman of Arabesque, a group of financial technology companies, has a claim to being the inventor of the E.S.G. label. He was the founder of the United Nations Global Compact, which, in 2004 launched an effort to “better integrate environmental, social and corporate governance issues in asset management, securities brokerage services and associated research functions.”

He says even chief executives who insist on making long-term climate pledges will not be able to stick to them. It’s like marriage vows, Mr. Kell says. Divorce rates show that half of couples won’t live up to them.

It doesn’t help that E.S.G. has become part of the U.S. culture wars, with Gov. Ron DeSantis of Florida and his followers bellowing at those who make sustainability promises. Mr. Kell can see the sense in chief executives being quiet about their climate commitments. “Avoid unnecessary political exposure. Maybe don’t use the term E.S.G. for the next year or two until the presidential elections are over,” he advises.

Events Beyond a C.E.O.’s Control

Chief executives will also need to accept that, apart from the political crossfire, external events may stymie their environmental intentions. Russia’s war on Ukraine made plain that our economies can’t yet do without fossil fuels. Mr. Kell agrees with Larry Fink, the chairman and Chief executive of BlackRock and a supporter of stakeholder capitalism. In his 2023 letter to investors, Mr. Fink conceded that the move to sustainable energy “will not be a straight line. Different countries and industries will move at different speeds, and oil and gas will play a vital role in meeting global energy demands through that journey.”

But Mr. Kell argues that the direction of travel remains clear. “Decarbonization is here to stay,” he said. Whatever the pressure from politicians or shorter-horizon investors, Mr. Kell says corporate leaders should ensure, however quietly, that “your narrative, your strategy is robust, updated continuously.”

As for greenwashing, Ms. Howard-Grenville counsels chief executives against being panicked into overpromising. “It’s always smarter and safer to do more than you say than, obviously, to say more than you do.”

Michael Skapinker is a London-based business writer and the author of “Inside the Leaders’ Club: How Top Companies Deal With Pressing Business Issues.”

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