A key proposition for incorporating ESG criteria into investment analysis and decisions is that issues such as climate change, pollution, labour standards, and tax transparency impact the risk, volatility, and long-term return of securities. However, opponents of ESG have raised concerns about the potential of left-leaning entities to use ESG to force their political ideals on others. Moreover, the lack of a universal definition of ESG, standardised methodologies, and variations in interpretations of fiduciary duty continues to be major impediments.
ESG has been proposed as a mitigator of risks including the legal risks associated with illegal labour practices and the costs of property damage caused by climate risks. The realisation that ESG itself poses financial risks might come as a gloomy surprise to many. After all, most ESG-related legal suits are aimed at corporations alleged to have insufficiently incorporated ESG issues.
In June 2023 the US Supreme Court made a decision declaring the consideration of race in college admissions as unlawful. This decision reverberated across the nation, with numerous non-college implications. The differing interpretations of “equal protection” were at the centre of the contestations. The decision’s impact on the flexibility of companies to hire based on race considerations and other forms of “diversity hiring” is the next line of the contest. In general, proponents of race-conscious decision-making argue that continued discrimination based on factors such as race warrants the continuation of affirmative actions to rectify the wrongs. Opponents would however say that socioeconomic factors such as income status alongside other individual experiences (including racial discrimination) of a candidate offer sufficient material for making admission or hiring decisions. Both sides, however, tend to agree on the value that emanates from students of varying backgrounds studying together and learning from each other, but the means to this end remains contentious.
In the US financial sector, attempts to explore the risks associated with ESG and DEI have begun, albeit slowly. In December 2024, the Independent reported on a proposal by the National Center for Public Policy Research asking Costco to report on the financial risks associated with their DEI efforts. The proposal was based on the argument that the company is exposed to reputational and financial risks; potential lawsuits and accompanying legal costs for defending against accusations of discrimination against Whites, and Asians among others could amount to tens of billions of dollars. The board in this case reasserted their view on the importance of “inclusion” in enhancing innovation and creativity; shareholders were advised to vote against the proposal. It was not as easy for some other companies.
America First Legal (AFL) in August 2023 launched a lawsuit against Target in federal court, on behalf of a Target shareholder, Brian Craig. It alleged financial losses related to Target’s ESG and DEI activities. AFL alleged that, although Target had “assured shareholders and investors that the Board was monitoring for social and political issues and risks arising from the company’s ESG and DEI mandates,” it disregarded opposing views of customers and shareholders concerning the marketing and sales campaigns, which predictably caused “more than a $12 billion collapse in share value, the largest stock price decline in over 20 years.” Target had sought to dismiss the suit, but in December 2024, Forbes reported that “Judge John Badalamenti just ruled that the plaintiffs presented sufficient information to pursue the claims that Target misled investors,” perhaps signaling the seriousness of properly accounting for ESG and DEI risks.
According to Reuters reporting in January 2023, Blackrock the biggest asset manager in the world had experienced headwinds in their ESG plans partly because encouraging decarbonisation is seen as an affront to the petroleum industry. Blackrock lost circa $4 billion in Assets Under Management due to a recent counteraction against their ESG ambitions. The loss was not highly significant since the company also reported taking $230B from US clients during the same period. In November 2022, Bloomberg.com reported that Blackrock among others had been sued by a group of states including Texas for allegedly breaking antitrust laws and “combined their market clout and membership in climate groups to pressure coal producers to cut output,” with the impact of increased power bills for residents. There has been less opposition in other markets such as Europe, Australia, and Japan. Nonetheless, the European Union (EU) has recently taken steps against strategic lawsuits against public participation (SLAPPs) by publishing the Anti-SLAPP Directive, which will be adopted by member states.
According to the Absa Africa Financial Markets Index 2024, Green bonds dominate Africa’s ESG products, in the following countries: Egypt, Kenya, Morocco, Nigeria, South Africa, Tanzania, Cabo Verde, Mauritius, Namibia, and Zambia (new entrant). The same countries have “other ESG products” with the addition of Botswana and Rwanda as new entrants. Since most of the controversial ESG risks are related to subjective social issues and political affiliations as compared to, for instance, Green bonds consisting of programs such as solar power plants, waste management, and student accommodation, ESG-related financial risks arising from lawsuits are expected to be minimal in African countries and most developing economies. A determinant of these risks in the distant future will be the ratio of US versus EU investments in developing economies. Culture wars, policy directions, and political machinations in countries with great funding impetus will continue to impact decision-making in developing economies.
Kestani 
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