President Donald Trump’s inauguration has sent a cool breeze through the corridors of ESG advocates and purveyors, and has seeded doubt among directors on ESG scorecard suitability.

As our latest global sustainability incentives report shows, published in this newsletter (See HERE), the prevalence of climate metrics in scorecards has risen progressively each year for 5 years.

Yet, many are concerned this tide will turn given President Trump’s ascendence to office once again, with his first actions including a roll back of climate initiatives such as the US withdrawal from the Paris climate agreement, cutbacks in the Inflation Reduction Act expenditures, and withdrawal of support for diversity, equity and inclusion initiatives within the military and government.

High profile asset managers, such as BlackRock, JP Morgan and PIMCO are stepping back from groups such as Climate Action 100+ and Net Zero Asset Managers (See HERE and HERE). The latter has also launched a review to ensure it remains “fit for purpose in the new global context”.

The ASX Corporate Governance Council’s Chair Elizabeth Johnstone has nodded into the trend with her recent AFR response to concerns on the practicality and legality of some suggestions in the 5^th draft of the Principles and Recommendations, one of which states that “The board of a listed entity should … c) if it is considering other relevant diversity characteristics for its board membership [than gender diversity] disclose those diversity characteristics” (See the chair’s comments HERE). The 5^th Draft has been in consultation for almost a year now (See HERE) with no final version in sight.

Considering the above, one could be forgiven for thinking ESG has heard its bell toll.

Yet, interestingly, BlackRock International maintains membership of the ASX Climate 100+ organisation. And even for the US BlackRock, BlackRock was at pains to say “we will continue to undertake our responsibilities with a sole focus on advancing their economic interests. This includes continuing to engage with companies and encourage disclosure on how they manage climate risk, where material to their business model and ability to deliver durable long-term financial returns.” (See HERE).

In other words, environmental destruction, employee fatalities, country wide telecommunications outages, systemic employee underpayments, fee for no service scandals, uninsurable homes, and higher tariffs and taxes due to high emissions are bad for business. The need to ensure that material risks are managed will not disappear.

Outside of the US, Guerdon Associates sees the current pullback not as an ESG death knell, but rather as a pull back to sustainability that matters (with, as readers may note, a re-branding from ESG to sustainability). For remuneration, all items on the scorecard should have the ability to turn the dial, be material and relevant to the company’s strategy.

While a minority of ASX listed companies may have applied ESG scorecards  as a sop to certain investors and activists, most have genuinely tried them as a lever to drive performance in the areas that matter most to the business. As a check, many utilise the SASB or MSCI ESG materiality maps.

It may also mean tough decisions about what becomes a “pay for” metric versus a “takeaway” metric. CGI Glass Lewis has views on what makes the cut to be an incentive rather than a malus trigger that we suspect are more broadly shared, see HERE.

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