Spotlight On ESG Investing: The Importance Of Understanding Environmental, Social And Governance Factors And Their Impact On Investing

• Published date: 21 October 2021
• Subject Matter: Corporate/Commercial Law, Environment, Corporate and Company Law, Environmental Law, Climate Change, Shareholders
• Law Firm: Mintz
• Author: Charles A. Koech and Jonathan L. Kravetz

The Corporation's Role in Society Today

During the past several years, public companies have come under increasing pressure from investors and society at large to use their resources and influence for broad and meaningful social impact. Millennials and Generation Z are particularly focused on the role that corporations play in advancing social issues, but their interest is shared by many in other age demographics as well.¹ This trend is not new, and many large public companies have responded. In 2015, for example, Apple, Facebook, Google, Microsoft, Coca-Cola, and Johnson & Johnson were among 397 companies that filed an amicus brief asking the Supreme Court to overturn a lower court ruling against same-sex marriage in Obergefell v. Hodges.² Corporations are also actively tackling issues of racial diversity on their boards after the murder of George Floyd. In 2020, among the new directors joining Fortune 500 company boards, 28% of new board seats were filled by Blacks, up from 10% the prior year, and almost three-quarters of the appointments occurred in the months after Mr. Floyd's death.³ Corporations are also leading the charge to combat the uptick in hate crimes against Asian Americans and Pacific Islanders ("AAPI") since the COVID-19 global pandemic. Corporations such as Apple, Peloton, Airbnb, and Nike donated money to nonprofits tasked with combatting AAPI hate crimes and created popular social media campaigns denouncing racism.⁴ Corporations and institutional investors also spoke out firmly and swiftly against the January 6, 2021 insurrection at the U.S. Capitol building. Beyond just issuing statements, companies acted to show their disproval. For example, Amazon suspended PAC contributions to U.S. lawmakers who voted against the certification of the election.⁵ This action of suspending political donations was followed by dozens of other high-profile corporations, including Airbnb, American Airlines, American Express, Boston Scientific, Dow Chemical Company, and Walmart.⁶ From an ESG perspective, the implication of these actions is clear: corporations are getting the message that they must view themselves not simply as business enterprises, but as entities firmly intertwined with the broader society, and it is crucial they understand that both society and their investors expect them to act as leaders in areas of social justice and environmental stability.

One indication of the growing importance of ESG issues to corporations is that CEOs have become more outspoken on divisive political issues such as voting rights.⁷ Thus, in the wake of last year's general election and the ensuing efforts in many states to restrict voting rights, the CEOs of corporations like Delta Air Lines and Coca-Cola have spoken out against such legislation. ESG issues also matter deeply to institutional investors. Institutional investors are requesting that companies become leaders in social issues, a new ideology aimed at expanding the corporation's role in solving issues of social injustice. Larry Fink, the CEO of BlackRock, stated in his 2021 letter to CEOs that the United States is at a historic crossroads on the path to racial justice, an issue that cannot be solved without leadership from companies.⁸ Clearly, the philosophy that a corporation's sole responsibility is to pursue profits and enhance shareholder value while remaining silent on social issues is no longer the prevailing ideology. Institutional investors are demanding that corporations play a major role in addressing social injustices.

Corporations as Citizens and ESG as a Tool to Act

As declared in Shakespeare's The Tempest, "What's past is prologue," and if that holds true, the...