Manchin’s clean energy deal is a game-changer for ESG

ESG investment finally has a chance to move beyond politics.
Making waves.
Making waves.
Photo: Elizabeth Frantz (Reuters)
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Over the course of two days in July, West Virginia emerged as the perfect proxy for America’s messy reckoning with climate change. First, it moved to punish banks for divesting from old economy coal and fossil fuels; next, its senior US senator had an abrupt change of heart and supported a serious step up in investment in the transition to clean energy—including next generation nuclear power, low-emissions hydrogen fuels, incentives for electric vehicles, carbon capture for coal, and tax credits for wind and solar.

The package to secure jobs and the planet won US senator Joe Manchin’s support with provisions to shore up fossil fuels, including offshore leasing for oil and gas, and targeting wind and solar plants in areas where coal mines are closing. The legislation, which pumps hundreds of billions of dollars into low- and no-carbon technology, sends a clear message: Energy-intensive states like West Virginia have a lot more to gain than to lose if they lean into American competitiveness and economic security at home and help catalyze the new industrial revolution.

The bill’s passage is not yet assured, but the prospect of a reset is good news for citizens who want action on climate change. It also invites us to reconsider the narrative about so-called ESG investment. Maybe we can begin to ditch the hackneyed acronyms and modifiers of capitalism (conscious-sustainable-ethical-responsible-creative-woke) and embrace the reality that we will not make progress labeling stocks as good or bad. It’s time for all-hands-on-deck; we all benefit from having long-term, future-oriented decisions at the heart of corporations able to deploy remarkable capacity and problem-solving skills.

Environmental, social, governance: Can we just call it good business?

This moment came just in time. ESG investing has become politicized, maybe hopelessly so. But we cannot escape the need for business decisions that enable sustainable risk adjusted returns for investors and a healthier return to the people who make the products, deliver customer services, keep infrastructure and technology in working order, and manage complex supply chains.

Two things should now be clear to politicians on both sides of the aisle. One, there is a future beyond fossil fuels, and it will create jobs. The new economy requires new infrastructure, but also new skills. If we are smart about this, it should especially help those who have been sidelined in the transition thus far.

Second, behind what seemed like a sudden shift in the political winds is a host of change agents—labor representatives and environmentalists, but also business executives from emergent industries, who see a better future and can articulate the benefits to West Virginia and beyond. These strange bedfellows were instrumental in the change of direction in Washington, and their ability to work in effective coalitions will build from here.

What does this mean for asset managers and investors?

Investors are part of this game, but as of yet, only a segment of the investment market signals strong and consistent demand when it comes to changing the playbook.

This moment offers a powerful opportunity for a reset, to consider anew the right balance between risk to the investor and risk to the planet. But “doing the right thing” as an investor is still illusive.

As the cover comes off ESG investing, and the upside of picking up the pace of change gains currency in the public square, we are reminded that there is only one path forward. All investors want favorable returns, and all of them have concerns about the systems on which business depends—the health of the markets and our democracy, the vitality of our economy, and the planet. The high-road choices are good for everyone involved.

In that context, dividing stocks into “ESG” or not is at best confusing. “Doing Well by Doing Good” may help sell funds, but there are real costs to conducting business according to universal standards for human rights, the fair exchange for labor, and the protection of natural resources. The need for capital investment is at a scale that is hard to comprehend. It no longer works to incentivize the CEO to return 90-plus percent of free cash to shareholders at the cost of employees and investment in infrastructure and sustainability.

It will continue to be a wild ride for companies

We are playing a long game, and the upfront costs of achieving a healthier economy are real. Long-term value creation requires turning down the noise from traders fixated on share price today, while amplifying the voice of the real investors who offer companies room to breathe.

But even then, the role of investors is at best indirect; for many, the only choice is about whether or not to invest. It is the corporation—in terms of both governance and the employee base—that is the real locus of change.

Every company is different and there are critical choices to make to meet carbon reduction goals, manage relationships, and maintain the license to operate. Boardrooms can respond by leaning into a different kind of executive—one who understands that the job of the CEO embraces an ecosystem of players, inputs, and concerns about the long-term health of the enterprise.

Governments and politicians also have choices to make. The best ones will connect the dots between the long-term health of the commons, and the kinds of investments and subsidies that move us forward.

Carbon may be the most obvious and measurable cause of inaction, but there are other externalities that pose tangible risks for the economy. Addressing them will be expensive; doing business as usual will be even costlier.

There is momentum on this, finally, from Washington and West Virginia, in boardrooms and at union bargaining tables, and in the give and take between employees and executives. We have a fresh start, and a shared goal. The stakes could not be higher.

Judy Samuelson is executive director of the Aspen Institute’s Business and Society Program and author of “The Six New Rules of Business: Creating Real Value in a Changing World.”