Disney-DeSantis Fight Tests Boundaries of Corporate ESG Push

The Walt Disney Co. lawsuit against Florida Gov. Ron DeSantis is being closely watched by companies as a harbinger of how far government officials can go to rein in corporate environmental, social and governance strategies.

Disney is alleging the Republican governor retaliated against the company for its opposition to a state law which broadly prohibits classroom instruction of sexual orientation or gender identity, in an April 26 lawsuit. DeSantis sought to exert control over the special-purpose land use contract the company uses for its sprawling Disney World resort in response to the company’s criticism.

The legal battle is about more than the degree of control Disney can exercise over its Florida theme parks and resorts, corporate law professors say. It’s a clash over implementing ESG principles that have engulfed corporate America, amid opposition from conservative government officials, including DeSantis, who have started moving against them.

A DeSantis victory could have a “chilling effect” on companies’ ESG polices, said Dorothy Lund, corporate governance professor at the University of Southern California.

“This should trouble conservatives and liberals alike,” Lund said. “You don’t want companies to feel like they can’t make profit-maximizing ESG choices because they are worried that they will be vulnerable to retaliation from a red state.”

‘War Game’

The fight is already affecting how companies are thinking about their ESG strategies as the 2024 election season begins to heat up, said Doug Chia, a fellow at the Center for Corporate law and Governance at Rutgers Law School.

“It’s only going to get louder and politicians are going to be looking for more opportunities to find a company that they can make the enemy of the American people,” he said.

Companies will have to prepare defense strategies to figure out which policies or issues government officials might target them over and how to prepare. Chia said. “It’s like an anticipatory war game,” he said.

The anti-ESG movement was rooted in earlier moves by Republican governors and attorneys general to challenge investment managers like BlackRock Inc. over how ESG critieria has been employed in managing state pension funds.

DeSantis isn’t the only state official to target specific companies for their ESG principles. Texas passed a law in 2021 barring the state from doing business with companies that “discriminate” against gunmakers.

The state sought to punish banks like Citigroup Inc. which enacted a 2018 policy restricting banking services to the firearms industry after 17 high school students died in a mass shooting in Parkland, Fla.

In January, Texas Republican Attorney General Ken Paxton’s office “determined that Citigroup has a policy that discriminates against a firearm entity or firearm trade association,” according to a letter dismissing the bank from underwriting public bond markets in the state.

While Citi argues its policies are nuanced enough to comply with the law, Paxton announced it would exclude Citi and a handful of other banks from underwriting the state’s largest-ever municipal bond transaction.

The examples in Texas and Florida mean ESG, which was a tool to determine future risks, has now become a liability, Chia said.

“We’ve come full circle: ESG is now an ESG risk,” he said.

‘A Financial Thing’

The looming question is how much the DeSantis-Disney conflict will make companies rethink their ESG strategies.

Politicizing ESG interferes with companies’ decision-making ability and properly evaluate significant risks, said Ann Lipton, a Tulane University business law professor.

Flooding, due to climate change; health and safety of employees; and executive pay all fall under ESG. To label those risk factors—and many, many more—as somehow political is backward in a capitalistic system, Lipton said.

“ESG is a financial thing. This is not about companies going out to do good in the world, out of the goodness of their hearts,” Lipton said. “This is the set of nonfinancial concerns that really do impact the company financially.”