The Bottom Line On Marked Down ESG

Todd Moses
July 9, 2024

A corporation has a fiduciary responsibility to its shareholders that goes beyond any promise to the customer.

Inputs that matter: While the customer may be right, a company must make decisions in the best interest of those who own its stock.

  • In recent years, environmental, social, and governance (ESG) investors have tried to force companies to support actions that may be contrary to their customer base.
  • For example, in April 2023, Bud Light faced a boycott after partnering with transgender influencer Dylan Mulvaney on a social media post.
  • As a result, Bud Light's sales declined, and Modelo Especial replaced it as the top-selling beer in the United States in June 2023.
  • Anheuser-Busch, Bud Light's parent company, reported that its revenue in the second quarter of 2023 fell more than 10% from the previous year, primarily due to the boycott.

The opportunity: As ESG investing reaches the Supreme Court, the "shareholders' best interest" is being applied outside of revenue.

  • Reuters reported that the 5th US Circuit Court of Appeals, based in New Orleans, will hear arguments on Tuesday from 25 Republican-led states opposing the Department of Labor's rule.
  • The rule in question allows 401(k) and other retirement plans to consider ESG factors as a "tiebreaker" in investment decisions.
  • The heart of the case is whether the Employee Retirement Income Security Act of 1974 permits retirement plans to consider non-financial considerations.
  • The Labor Department contends that the law does not explicitly prohibit considering ESG factors, provided financial interests are prioritized.

Zoom in: Last month, The Supreme Court curtailed the executive branch's ability to interpret laws it's implementing, giving the judiciary more say in what federal agencies can do.

  • The landmark 6-3 ruling, which was based on ideological principles, overturns the court's 40-year-old "Chevron deference" doctrine.
  • This ruling could make it harder for executive agencies to tackle a wide array of policy areas, including environmental and health regulations and labor and employment laws.
  • The ruling marks another major victory for conservatives, who have sought to limit the federal government's ability to regulate businesses for decades.
  • In the wake of the court's ruling, more federal rules are expected to be challenged in the courts, and judges will have greater discretion to invalidate agency actions.

Between the lines: The Reagan-era Supreme Court created the doctrine in Chevron U.S.A. v. Natural Resources Defense Council in 1984 and has since become the most cited Supreme Court decision in administrative law.

  • Under Chevron deference, courts would defer to how expert federal agencies interpret the laws they are charged with implementing, provided their interpretation is reasonable—even if it's not the only way the law can be interpreted.
  • It allowed Congress to rely on the expertise within the federal government when implementing everything from health and safety regulations to environmental and financial laws.

Follow the money: Meanwhile, global investors are turning their backs on sustainability-focused stock funds as poor performance, scandals, and attacks from US Republicans hit enthusiasm for a much-hyped sector that has pulled in trillions of dollars.

  • According to Barclays research, clients have withdrawn $40 billion from ESG equity funds this year.
  • The outflows mark a significant reversal for a sector investors have flocked to in recent years, attracted by the claim that such funds support their ideology.

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