Anti-ESG standards: law and practice (elements of foreign experience)

Chetverikov Artem Doctor of Law Professor, Integration and European Law Department, Kutafin Moscow State Law University (MSAL) 123001, Russia, Moscow, Sadovaya-Kudrinskaya str., 9 rossija-artem@rambler.ru Other publications by this author

"Less administrative spirit in business life and more business spirit in administration"Henry Ford ^{[1, p. 8]}

One of the most popular neologisms, which in the XXI century replenished the world economic, political, legal lexicon, became the abbreviation ESG, which stands for "environmental, social and managerial" standards, or criteria (English environmental, social and governance; French environmentaux, sociaux et de gouvernance).

The purpose of the ESG standards is to serve as a measure of how the activities of participants in public relations, primarily business representatives, contribute — and whether — to achieving the goals of "sustainable development" (development aimed at achieving the prosperity of mankind in the long term, not limited to the immediate needs of today) in different dimensions, namely:  

1) are the company's business projects consistent with the "climate agenda" (the fight against climate change) and, in general, do they contribute to the preservation and improvement of the environment - "environmental" standards E;

2) is the business practice of the enterprise socially oriented in terms of affirming the ideals of social justice, protection of human rights, combating discrimination, etc. - "social" standards S;

3) is the same social justice ensured in the internal functioning of the enterprise itself, in particular, from the point of view of respect for the interests of minority shareholders (when it comes to large companies, usually acting in the form of a joint-stock company), reasonable and transparent remuneration of members of the management bodies of the enterprise, the presence of representatives of different genders in these bodies, and social groups — standards of "corporate governance", briefly "management" standards "G".

(According to the official definition of the United Nations, formulated at the end of the XX century: "Sustainable development is development that meets the needs of the present, but which does not jeopardize the ability of future generations to meet their own needs" ^{[2, p. 59]}. The economic, political and legal aspects of the concept of sustainable development, the essence, subject and problems of the implementation of the "right of sustainable development" in Russia and the world are currently the subject of a wide range of general and special studies by Russian and foreign scientists [see, for example, 3-17, etc.]).

De jure, ESG standards are voluntary in nature, de facto their voluntariness is becoming more and more illusory: after all, an enterprise that refuses to take on ESG obligations or takes them to an insufficient extent loses its chances of receiving financial resources from ESG-oriented public or private investors and investment intermediaries (banks, exchanges, investment funds, etc.), which, in a market economy based on loans and credits, is almost equivalent to winding down a business.

Innovations introduced by the introduction of ESG standards into the functioning of modern business, on the one hand, are motivated by good aspirations: to make society and its environment healthier, fairer, humane, and the behavior of participants in public life less selfish. On the other hand, like other attempts repeatedly made in the past to reorganize public life in order to build an "ideal society" (including socialist and communist ideas), they also have negative manifestations.

First of all, this is the imposition of a double regulatory burden on business representatives: to the mandatory requirements (legal norms) that are enshrined in legislative and by-laws on environmental, labor, corporate law, etc. and for non-compliance with which legal responsibility comes, business representatives are now forced to assume increased, supposedly "voluntary" obligations under standards ESG as a condition for obtaining funds from investors guided by these standards.

A double administrative burden is added to the double regulatory burden: after all, in addition to the traditional, centuries-old financial (accounting) reporting, enterprises now have to compile and submit "non-financial" reporting ("ESG reporting", reporting on "sustainability", "sustainable development" = in relation to the promotion of sustainable development goals, etc. ^{[18, p. 1215]}), gradually becoming more complex, detailed and demanding.

ESG reporting, like any other, of course, is not complete without distortions (embellishing achievements and downplaying problems): and all in order to get the coveted ESG rating, preferably as high as possible, because competitors in the fight for ESG financing are also not asleep!

(According to the definition of the Canadian Securities Authorities, an institution that unites the authorities of the Canadian federal subjects for financial market management: "ESG rating, or ESG indicator, is an assessment of an organization or product for ESG characteristics, ESG efficiency or ESG performance, including the impact of risks and (or) opportunities on them in the field of ESG" ^{[19, p. 13]}. Currently, there is a wide variety of ESG rating systems in the world and even in individual countries. According to the Association of Auditors of Canada, by 2020 there were more than 600 of them on the planet — each with its own approaches, methods of evaluation and verification, etc. ^{[20, p. 15]}).

Manipulation of ESG standards ("fraud") is also becoming increasingly widespread, with regard to the environmental component of which a special name has already been invented, used, among other things, in regulatory acts — "environmental forgery" (literally by analogy with laundering = legalization of proceeds from crime: green, or environmental "laundering" (Eng. greenwashing; French. ?co-blanchiment)): the company fights for the protection of nature only in words, in fact does nothing or even harms it.

We should also not forget about corruption manifestations, for the growth of which ESG standards, which are not always sufficiently clear and definite, create favorable ground (we are talking, among other things, about commercial bribery of representatives of non-state financial institutions, which in foreign legal systems is considered corruption in the private sector).

The negative and other ambiguous consequences of the introduction of ESG standards (for example, a reduction in investment in the military-industrial complex, whose products are vital for states, but, ultimately, can hardly be considered a boon for humanity and nature) are used by their opponents for the anti-ESG movement, or resistance, gaining strength in recent years.

The center of such resistance today is the United States of America (USA) — a country whose national type of inhabitants is characterized by the expression "self-made man" (Eng. self-made man ^{[21, p. 12]}) and where historically there is a clear division between the sphere of business, business initiatives focused on maximum profit, and concern for the common good (the first is the lot of free entrepreneurs, the second is the duty of state and public institutions).

As for the socially useful activities of business representatives, then, as stated by one of the creators of the largest American automotive business empires of the first half of the XX century, G. Ford:

"I am not at all for professional charity and business humanity of any kind. As soon as a human willingness to help is systematized, organized, made commercial and professional, her heart dies and she becomes a cold fruitless business" ^{[1, p. 267]}.

A caveat should be made: the resistance to ESG does not come from the entire American society, but from its part, which is becoming more extensive, active and aggressive (in terms of criticism of ESG standards) and covering its various segments, not limited only to the business community.

On the economic plane, resistance to ESG is expressed in the appearance of entrepreneurs and companies openly declaring their rejection of ESG. The most illustrative example is anti—ESG investment funds, which in their business financing strategy and practice refuse to follow ESG standards up to the public announcement of their desire to finance precisely such types of entrepreneurial activities and business projects that run counter to such standards ^[22-23].

Skepticism about the implementation of ESG standards is also observed among other representatives of American business. Thus, according to a survey conducted at the end of 2022 by one of the leading American business news channels regarding the environmental component of ESG corporate reporting, only 35% of their surveyed executives were in favor, while 55% disagreed, and 35% said they were "strongly against" ^[24]. 

On the political plane, anti-ESG agitation on the part of social movements is becoming more and more noticeable, an example of which is the Internet portal "ESG harms" (https://esghurts.com ) expressing the interests of conservative circles of the American society of the non-governmental organization "Heritage Action" ^[25].

At the same time, the anti-ESG campaign is being carried out by party and state figures from different US states ^[26]. The role of its national leader today is claimed by the Governor of the state of Florida, R. DeSantis (a likely candidate of the Republican Party of the USA in the next presidential election of 2024), who described in February 2023 the use of ESG standards in financial markets in the following terms:

"Using arbitrary financial metrics ESG, which do not benefit anyone, except for the companies that created them, the elites bypass the ballot boxes [go against the will of voters — Auth.] for the sake of implementing a radical ideological agenda" ^[27].

The anti-ESG Political Action Program is set out in a Joint Political Statement on ESG dated March 16, 2023, signed by the governors of about half (18 out of 50) American states ^[28]; earlier, on June 15, 2022, the attorneys general of 19 states jointly criticized ESG in a letter collectively sent to the Federal Securities Commission securities and exchanges ^[29].

In the Joint Political Statement on ESG dated March 16, 2023, in particular, it says:

"The spread of ESG throughout America [meaning the USA — Author] is a direct threat to the American economy, individual economic freedom and our way of life <...>

To protect people from the promotion of ESG, which threatens the viability of the American economy and American economic freedom, we agree to undertake efforts at the state level, in particular the following:

1. Protecting taxpayers from the influence of ESG in state systems. Among other things, this may include preventing the use of ESG in all investment decisions at the state and municipal levels, ensuring that only financial factors are taken into account to maximize the return on investment, equal protection for pensioners and taxpayers. This may also include refusing to take ESG factors into account by state and municipal governments when issuing bonds, or prohibiting state fund managers from taking ESG factors into account when investing taxpayer funds.;

2. Protecting citizens from the influence of ESG in the financial sector. Among other things, this may include prohibiting the financial sector from using so-called “social credit scores” in banking and lending practices, aimed at preventing citizens from receiving financial services such as loans, credit lines and bank accounts. This may also include prohibiting financial institutions from discriminating against customers for their religious, political or social beliefs, such as possession of firearms, in relation to measures to strengthen borders or to strengthen our energy independence"^[28].

The implementation of the provisions of the above program began even before its adoption and is reflected on the legal plane in the measures implemented by introducing anti-ESG standards into parliamentary laws and law enforcement practice of executive authorities.

Anti-E SG standards in law enforcement practice are consolidated in by-laws, as well as in official instructions, statements, etc. of heads of state financial funds and other managers of financial resources of American states, according to which, in any investment, only "monetary factors" should be taken into account, i.e. the profitability of investments (a rigid version of anti-ESG standards) or, along with monetary factors, it is allowed to use non-monetary ones (environmental, etc.), but only if this does not reduce the economic profitability of the investment (a soft version of the anti-ESG standards).

An example of a rigid version of anti-ESG standards in law enforcement practice is the Resolution of the State Governing Council of the State of Florida dated August 23, 2022, containing an updated version of its investment policy in the management of state pension funds ^[30]. According to section 1 of the Resolution "Investment Care and Investment Evaluation Standard":

"a) The Board's assessment of any investment decision should be based only on monetary factors. The term “pecuniary factor” used in this section refers to a factor that the Board prudently considers as capable of having material consequences with respect to the risk and return on investments based on adequate investment horizons corresponding to the investment objectives of the fund and the financing policy. Monetary factors do not include consideration of the promotion of social, political or ideological interests.

b) The Council cannot subordinate the interests of participants and beneficiaries to other purposes and cannot sacrifice the profitability of investments or take on additional investment risk in favor of any non-monetary factors. The weight given by the Council to any monetary factor should be a proper reflection of a prudent assessment of its impact on risk and profitability."

The above standard is a reflection of the postulate enshrined in the last paragraph of the preamble of the Resolution, according to which "the obligation of the State of Florida is to invest in funds only in a way that gives priority to the highest return on investment for beneficiaries without taking into account non-monetary views or political factors" ^[30].

The anti-ESG standards in a soft version (taking into account ESG factors is legally permissible if it does not harm profitability or if the owners of the invested funds themselves want it) provides for the legal position set out in the letter of the State Treasurer of Louisiana dated October 5, 2022 ^[31].At the same time, as can be seen from the following quote from the letter, the author refers to the tough ideological opponents of ESG:

"Environmental, social and managerial (ESG) investing contradicts the Louisiana Law on fiduciary duties [duties of persons managing financial assets of other persons — Auth.], which requires focusing exclusively on financial returns for beneficiaries of public funds. Focusing on ESG's political and social goals or setting these goals above the obligation to increase returns for investors is unacceptable under Louisiana law <...>

I am convinced that ESG investing is more than a bad business; it is a threat to our fundamental principles: democracy, economic freedom and individual freedom. It threatens our democracy, bypasses the ballot box and allows large investment firms to promote political programs. It threatens our economic freedom because these firms use their huge blocks of shares to force company executives to put political motives ahead of company profits and investor returns. Finally, it threatens our personal freedom, because these firms use our money to promote their programs that are contrary to the best interests of the people whose money they use! There is a difference between offering ESG investment as an option for those investors who want it, and using non-ESG investments of other people to promote initiatives of ESG supporters" ^[31].

An example of anti-ESG standards in the legislation of American states can serve as section 21-10-8.1 "Social Investment — prohibition", included in 2021 in the Code of Laws of the State of North Dakota (Chapter 21-10 "State Investment Council" of Section 21 "Government Finance"):

"1. The term "social investment" used in this section means taking into account the criteria of social responsibility when investing or allocating public funds to obtain a result other than the maximum return for the state.

2. Unless otherwise provided by the state investment policy regarding the investment of the heritage Fund, and if the State Investment Council is unable to demonstrate that social investments will provide an equivalent or superior rate of return compared to similar investments that are not social investments and have a similar time horizon and a similar risk, the Investment Council is not entitled to invest public funds for social investment purposes" ^[32].

In essence, the same anti-ESG standard (in a mild version), but with respect to all its elements (not only social), has appeared in the Idaho Code of Laws since 2023. The first paragraph of section 63-2345 "Unsupported State investments" of chapter 26 "Miscellaneous provisions" of section 67 "State Government and State affairs" of this Code reads:

"No public organization engaged in investment activities [an organization that is an integral part of the mechanism of state public authority, including municipalities — Auth.], should take into account environmental, social or managerial characteristics in a way that could hinder the implementation of the rule of a prudent investor [an investor seeking maximum profit — Auth.]. Public an organization acting as a proxy in the selection of possible investment options for investors has the right to propose preferred environmental, social and managerial investment approaches, but such investments should not be mandatory, and sufficient alternatives should also be offered" ^[33].

In one of the largest US states — Texas, legislators for the sake of protecting the interests of the fuel and energy complex (whose activities are not always favorable for the environment, especially in the production of shale oil and gas!) We went further and adopted a law on the creation of a blacklist of investment firms boycotting energy companies.

The legislative act adopted in Texas was called the Law "On state Contracts with Some Companies that Boycott Energy Companies, and on state Investments in such Companies" (in force from September 1, 2021) ^[34]; informally, it and its analogues in other states are known as "anti-boycotting laws" (Eng. anti-boycott laws).

The concept of "boycott of an energy company" in modern Texas legislation (Chapter 809 "Prohibition of investments in Financial Companies that boycott certain Energy companies" of the Texas Government Code as amended by the anti-boycott Law of 2021 ^[35]) is defined as a refusal to have business relations with any energy company that is engaged in mining, development, production, sale, transportation of fossil fuels and "does not undertake obligations to comply with environmental standards in excess of applicable federal or state law" (we are talking about an additional regulatory burden arising from ESG standards).

If a "financial company" operating in Texas (a provider of financial services, including banks) is seen in such a boycott of an energy company (or even business partners of the latter!), the State Financial Controller of Texas sends it an official notification of the need to stop the boycott, insubordination of which entails a ban on its support from the authorities (including the sale of previously purchased by the state of Texas of its securities).

As of the beginning of 2023, anti-ESG standards were already present in the laws, by-laws or other law enforcement practice of 7 American states; in 13 more states during the specified period, similar bills were submitted to their parliaments (legislatures) ^[36-39].

The model anti-ESG laws, for example, developed by the American Council for the Exchange of Legislative Experience, which unites legislators from about 1/4 of the states (English: American Legislative Exchange Council — ALEC), model laws "On the elimination of energy discrimination" (model anti—boycott Law) ^[40] and "On protection of state employees' pensions" (provides for the investment of pension funds based only on monetary factors with the possibility of applying ESG criteria only when they bring benefits) ^[41].

Resistance to the introduction of ESG standards also penetrates the federal level of government in the United States, as well as in other countries. In particular, at the beginning of 2023, both chambers of Congress (the US Federal Parliament) adopted a joint resolution blocking the application of a new rule of the Federal Ministry of Labor on taking into account the "climate factor" in federal state investment of pension savings (the resolution did not enter into force because US President J. Biden, who is a supporter of ESG, imposed on her veto) ^{[42, p. 4; 43-44]}.

An example of a critical attitude to the overly active implementation of ESG standards outside the United States is the resolution of the French National Assembly (lower and main house of the French Parliament) adopted in early 2022, which criticized the unwillingness of the European Union authorities to consider the military-industrial complex as conforming to ESG standards for the supply of investments in its products with environmental labeling and inclusion weapons production in the so-called European green "taxonomy", i.e. the official nomenclature of environmentally friendly activities (European Resolution "On the protection of the Industrial and technological base of European Defense and security from the consequences of the European taxonomy of sustainable finance" ^[45]).

As can be seen from the above, the conflict between the two visions of the further development of capitalism is currently growing in the West:

1) the vision of the pro-ESG, whose supporters refer to universal and environmental values that should be given priority over greed and personal gain (such references sometimes have a hypocritical nature, as evidenced, for example, by the investigations of European non-governmental organizations regarding the support by the French authorities of environmentally hazardous projects of French energy companies in Africa or the impact on the decision-making process by the supranational authorities of the European Union on the part of American investment funds financing environmentally unfavorable activities of fuel and energy complex enterprises ^[46-47]);

2) the anti-ESG vision, whose supporters prioritize the selfish needs of enriching businessmen, depositors, investors, and openly declare this.

Ideally, the first vision seems more attractive. However, it is impossible to discount the reasonable concerns of ESG opponents about the shackling of economic initiative, excessive regulatory and administrative burden, bureaucratization of economic life, other problems and manipulations accompanying the introduction and application of ESG standards.

In this regard, it seems interesting and practically important for Russia to monitor the results of the legal competition that is currently observed in the United States between the legal systems of states belonging to the pro-ESG camps (for example, California) and anti-ESG (for example, Texas).

American federalism has historically been characterized by a very high (much higher than Russia!) the autonomy of the legal systems of the constituent entities of the federation, where, according to European experts, "the states function as laboratories that allow experimenting at a more modest level with innovations in the field of legal regulation of companies," and "if successful, other states have a desire to imitate such innovations" ^[48].

I would like to hope that the legal confrontation between the US states pro-ESG and anti-ESG will allow us to develop optimal approaches to defining these standards or to replace them with more effective and less bureaucratic legal structures that, based on their own national interests, Russia and other countries will be able to adopt without repeating the mistakes made in the USA.

The research was carried out within the framework of the strategic academic leadership program "Priority — 2030"