ESG Scores and the Investment Industry: Why Should the Ensuring Sound Guidance Act Leave Room for Future Environmental, Social, and Governance Considerations?

Blog Post | 112 KY. L. J. ONLINE | September 5 , 2023

ESG Scores and the Investment Industry: Why Should the Ensuring Sound Guidance Act Leave Room for Future Environmental, Social, and Governance Considerations?

By: Tanner Fisher, Staff Editor, Vol. 112

On April 1, 2023, a transgender influencer named Dylan Mulvaney uploaded a short video to her Instagram page for a Bud Light giveaway promotion.[1] Mulvaney briefly showed a photo during the video depicting a special edition Bud Light can with her face on it, provided by Bud Light to celebrate her transition to womanhood.[2] Mulvaney’s short clip sparked a movement to boycott the American lager, which resulted in about $395 million in lost revenue in North America[3] and over $27 billion in market devaluation for Bud Light’s parent company, Anheuser-Busch Companies, Inc. [4]     

This development also sparked questions about whether environmental, social, and governance (ESG) investment considerations contributed to Bud Light’s marketing strategy.[5] A United Nations publication coined the term ESG in 2004.[6] The publication set the ambitious goal of regrouping the main pillars of ethical finance: environmental, social, and governance.[7] The environmental pillar assesses the efforts of a company “in terms of energy efficiency, greenhouse gas emissions, waste, water, and resource management.”[8] The social pillar evaluates “gender policies, protection of human rights, labor standards, workplace and product safety, and public health and income distribution.”[9] The governance pillar relates to “the independence of the board of administration, shareholders’ rights, managers’ remuneration, control procedures and anti-competitive practices, as well as the respect of the law.”[10] Measuring these categories can be difficult, which leads to unreliable results. There is no uniform system for assessing ESG efficacy, but a Kentucky federal Congressman is in a great position to create one.

Until the 2023 ESG report[11] is released, it won’t be certain whether the Mulvaney controversy was motivated by Anheuser-Busch’s desire to increase its ESG score.[12] This single event is representative of a much larger rolling debate about the proper role of ESG ratings in the investment industry.

In 2022, the U.S. Department of Labor approved a final rule allowing the consideration of ESG factors when fiduciaries exercise shareholder rights and select retirement investments.[13] The rule’s bulky and unimaginative name (“Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights”) is somewhat of a misnomer. A fiduciary’s consideration of ESG factors is not necessarily a prudent exercise.

Studies differ regarding the efficacy of ESG score prioritization and its effect on firm performance.[14] While some studies do show positive consequences of ESG reporting, other studies report “negative or non-significant results and different causal impacts.”[15] This phenomenon may be attributed to the complexity of ESG rating criteria.[16]

There is no doubt that increased focus on ESG ratings is causing a structural change in the investment sector.[17] A specialized market has developed to fill the need of asset managers to obtain precise information regarding ESG ratings.[18] The rating agencies of this niche industry lack commonality in the way they evaluate ESG information.[19] This lack of commonality even leads to different agencies providing opposite assessments of ESG performance for the same company.[20] This paradox creates a necessity for policy makers to develop a uniform set of common practices and reporting metrics for ESG factors.[21]

Even if a uniform set of criteria is developed for ESG evaluation, it may still be difficult to associate ESG conduct with firm performance.[22] Observations about the role of ESG in a company’s success may be tenuous in consideration of headwinds and tailwinds in certain industries, or within individual companies.[23] These factors cannot be fully controlled for, and they further complicate the ESG rating process.[24] Given the unreliability of ESG ratings, it is not prudent for fiduciaries to consider ESG factors when it comes to decisions about their clients’ money.      

U.S. Congressmen Andy Barr (KY) and Rick Allen (GA) reintroduced the Ensuring Sound Guidance Act in June of 2023.[25] According to a press release by Congressman Barr, the bill is intended to “protect retail investors’ retirement and investment accounts from asset managers who put environmental and social goals ahead of returns.”[26] Much like Kid Rock combatting Bud Light’s marketing ploy by blasting Bud Light cans,[27] Congressman Barr’s proposed bill effectively counters the Department of Labor rule from 2022 by revoking the ability of fiduciaries to consider ESG factors.[28]

The Ensuring Sound Guidance Act requires a fiduciary to determine the best interests of her client using only pecuniary factors, unless the client provides informed consent.[29] Pecuniary factors are defined as:

“[A] factor that a fiduciary prudently determines is expected to have a material effect on the risk or return of an investment based on appropriate investment horizons consistent with the plan’s investment objectives and the funding policy . . . .”[30]

The proposed bill rightfully hinders the use of ESG factors as a hammer in the fiduciary’s toolkit, but it does fall short in some respects. “ESG measurements are still a work in progress,” but they will be improved over time, [31] and policy makers are in the best position to blaze such a trail. Companies may make strategic business decisions that incidentally boost ESG scores, or increase firm valuation and shareholder returns by prioritizing ESG measures.

Kid Rock was caught drinking a Bud Light in Nashville just four months after obliterating the brand with a semi-automatic rifle.[32] Just as Kid Rock can still enjoy a cold one, Congressman Barr should remain open to the potential benefits of ESG prioritization by creating a uniform ESG rating policy and mandating a study into the effectiveness of ESG factors on firm performance.     

[1] Amanda Holpuch, Behind the Backlash Against Bud Light, N.Y. Times (Aug. 16, 2023), https://www.nytimes.com/article/bud-light-boycott.html.

[2] Dylan Mulvaney (@dylanmulvaney), Instagram, https://www.instagram.com/reel/CqgTftujqZc/ (last visited Aug. 31, 2023, 1:53 PM).

[3] Michelle Toh, Bud Light Controversy Cost Parent Company About $395 Million in Lost US Sales, CNN (Aug. 3, 2023, 10:32 AM), https://www.cnn.com/2023/08/03/business/anheuser-busch-revenue-bud-light-intl-hnk/index.html.

[4] Shannon Thaler, Bud Light Parent Anheuser-Busch’s Stock has Lost $27B over Dylan Mulvaney, N.Y. Post (June 2, 2023, 10:15 AM), https://nypost.com/2023/06/02/bud-light-parent-anheuser-buschs-stock-lost-27b-over-dylan-mulvaney/.

[5] Jon McGowan, Was Bud Light’s Dylan Mulvaney Decision About ESG?, Forbes (Apr. 12, 2023, 1:25 PM), https://www.forbes.com/sites/jonmcgowan/2023/04/12/was-bud-lights-dylan-mulvaney-decision-about-esg/?sh=6d4f32768ba4; Patrick Bet-David (@patrickbetdavid), X (Aug. 7, 2023, 6:20 PM),  https://twitter.com/patrickbetdavid/status/1688676634629754881 (“This is about ESG destroying a great [American] legacy company.”).

[6] Monica Billio, Michele Costola, Iva Hristova, Carmelo Latino, & Loriana Pelizzon, Inside the ESG Ratings: (Dis)agreement and Performance, 28 Corp. Soc Respons. and Env’t Mgmt. 1426, 1427 (2020).

[7] Id.

[8] Id.

[9] Id.

[10] Id.

[11] Fabrizio Tocchini, Grazia Cafagna, The ABCs of ESG Reporting: What are the ESG and Sustainability Reports, Why are they Important, and What do CFOs Need to Know, Wolters Kluwer (Mar. 9, 2022), https://www.wolterskluwer.com/en/expert-insights/the-abcs-of-esg-reporting#:~:text=What%20is%20ESG%20reporting%3F,organizations%20to%20do%20the%20same (“ESG reporting is the disclosure of environmental, social and corporate governance data.” These reports are designed to illustrate “a company’s ESG activities while improving investor transparency and inspiring other organizations to do the same.”)

[12] McGowan, supra note 5.

[13] U.S. Dept. of Labor, Release No. 22-2202-NAT, US Department of Labor Announces Final Rule to Remove Barriers to Considering Environmental, Social, Governance Factors in Plan Investments (Nov. 22, 2022), https://www.dol.gov/newsroom/releases/ebsa/ebsa20221122.

[14] Antonella F. Cicchiello, Ferninando Marrazza, & Salvatore Perdichizzi, Non-Financial Disclosure Regulation and Environmental, Social, and Governance (ESG) Performance: The Case of EU and US Firms, 30 Corp. Soc. Respons. and Env’t Mgmt. 1121, 1123 (2022).

[15] Id.; Billio, supra note 6, at 1428.

[16] Billio, supra note 6, at 1426.

[17] Id. at 1437. 

[18] Id.

[19] Id.  

[20] Id.

[21] Id.

[22] Lucy Perez, Vivian Hunt, Hamid Samandari, Robbin Nuttal, & Krysta Binie, Does ESG Really Matter—and Why?, McKinsey Quarterly, Aug. 2022, at 4.

[23] Id. at 6.

[24] Id.

[25] Barr and Allen Introduce ESG Act to Protect Investors and Preserve Access to Capital for Energy Producers, U.S. Congressman Andy Barr: Press Releases (June 21, 2023), https://barr.house.gov/2023/6/barr-and-allen-introduce-esg-act-to-protect-investors-and-preserve-access-to-capital-for-energy-producers.

[26] Id.

[27] Lee Brown, Kid Rock Shoots Bud Light Cans after Trans TikToker Dylan Mulvaney Partnership, N.Y. Post (Apr. 4, 2023, 12:03 PM), https://nypost.com/2023/04/04/kid-rock-shoots-bud-lights-amid-anger-over-trans-campaign/. 

[28] H.R. Res. 4237, 118th Cong. (as referred to the H. Comm. on Fin. Serv., June 21, 2023). 

[29] Id.

[30] Id.

[31] Perez, supra note 22, at 9.

[32] Ariel Zilber, Kid Rock Spotted Drinking Bud Light 4 Months after Shooting Cans over Dylan Mulvaney Fiasco, N.Y. Post (Aug. 18, 2023, 2:06 PM), https://nypost.com/2023/08/18/kid-rock-drinks-bud-light-after-shooting-cans-in-response-to-dylan-mulvaney/.