By Patrick Conley, Associate
When following financial news, it is increasingly common to hear some variation of “ESG is dead.” While it was nearly impossible to miss companies engaging with divisive social issues during the chaotic and turbulent political period of 2020 and 2021, some executives and investors feel that the lessening public outrage means they no longer need to do so publicly. If this perception is accurate, it would seem to give companies permission to go back to business as usual and pursue their interests in politics through more traditional methods, like lobbying, rather than directly addressing contentious issues.
However, recent controversies like Ron DeSantis’ public sparring with Disney, conservative activists targeting Bud Light for working with a trans influencer, and Starbucks employees striking over restrictions on Pride Month decorations all point to a different conclusion. It is possible that corporations are heading for an even more politically and socially uncertain period where a variety of factors make it harder than ever before to keep politics and business separate.
In addition, the Supreme Court’s May ruling on California’s regulation of pork production, which arguably paves the way for “interstate economic warfare,” will make it even harder for major corporations to avoid sensitive social issues. It is very possible that we are headed for parallel Red and Blue economies that will become incrementally less tolerant of companies seeking to straddle this divide.
Red and Blue Economies
While the past century of expansive interstate commerce may make this scenario difficult to envision, radically different political economies existed within the United States prior to the Civil War. Northern states had burgeoning industries that were still relatively weak compared to more developed European countries, while the South had a booming cotton industry that occupied a dominant position in international markets.
While these economies supported one another – for example, the cotton picked by slaves in Alabama directly fueled the growth of textiles mills in Massachusetts – this dynamic meant that Northern politicians favored more protectionist policies to restrict international competition with their infant manufacturing industries, and Southern politicians favored free trade policies that would give them access to cheap inputs and allow the cotton industry to expand. The abolition of slavery, significant federal investments in interstate infrastructure and 150 years of technological innovation have created a more integrated domestic economy than at any other point in U.S. history, but the antebellum period shows us that parallel economies can in fact take root and divide domestic markets.
Rather than dividing somewhat neatly along the Mason-Dixon line, Americans are now self-segmenting along jagged and blurry borders all over the country. This is happening digitally as social media users create their own bubbles, racially as Americans continue to live in largely segregated neighborhoods, and politically as conservatives flee Blue states like California. When a phenomenon like this takes hold in a country and touches this many aspects of day-to-day life, it is difficult to imagine a scenario in which it wouldn’t begin to affect major commercial enterprises.
One way to think about it is that angry voters are also angry consumers. According to a July 2023 survey conducted by Breakwater Strategy, only 19% of U.S. adults say they are satisfied with the current state of American democracy. In this environment, consumers are increasingly looking to buy from companies on their side of the partisan divide. Elon Musk’s takeover of Twitter and subsequent appeal to the political right, Patagonia putting “Vote the Assholes out” on their clothing tags in 2020, and Black Rifle Coffee becoming a national brand through its engagement in the culture wars are all examples of how corporations are catering to consumers’ political loyalties.
The Supreme Court’s confirmation of California’s ability to restrict what type of pork enters the state introduces a dangerous precedent to this tense environment. As Justice Kavanaugh pointed out in his partial dissent, states may now be able to restrict access to their markets based on companies’ internal policies and partisan leanings: “What if a state law prohibits the sale of fruit picked by noncitizens who are unlawfully in the country? What if a state law prohibits the sale of goods produced by workers paid less than $20 per hour?” While partisans may sympathize with the sentiment of these ideas, the potential chilling effect on interstate commerce is obvious and could have dramatic consequences.
Risk and Opportunity
This situation will introduce a new component of risk for nearly all major American corporations since their growth is largely tied to their ability to access and appeal to American consumers. While Michael Jordan’s famous “Republicans buy shoes, too” comment may as well have been the motto of any number of household brands for years, politicians and consumers are increasingly less willing to tolerate this sort of fence sitting on contentious issues.
With hard work and a bit of luck, some corporations may be able to balance competing political interests and continue to leverage the massive scale of the American economy. For others, however, more difficult decisions may have to be taken as they become the focal point of social media activist campaigns, targets of hostile politicians seeking to elevate their national profile, or simply misread public perceptions of their brand. While Democrats and Republicans both buy shoes, it will eventually become necessary to reexamine who your customers really are if one side stops buying your product for a sustained period.
While this is a problem for large corporations interested in selling to the widest share of the market possible, it could provide significant opportunities for smaller competitors willing to embrace this new sociopolitical environment. For instance, a smaller coffee chain mainly operating in liberal cities could cover their stores with Pride Month decorations in reaction to Starbucks employees going on strike. Meanwhile, regional beer companies in more conservative states could launch ad campaigns covered in stars, stripes, and eagles to capitalize on Bud Light’s drop in sales. While selling to only 40% of the country may be a scary proposition for a Fortune 100 company, it could massively change the trajectories of their upstart competitors.
Domestic commerce is more political than ever, and every company will need to develop their own strategies for avoiding public controversy and outmaneuvering their competitors. Failing to do so could have a significant negative impact, as several household names have found out this year, but finding creative ways to mitigate political risk and leverage its upside will transform up-and-comers and bolster established companies.
 YouGov conducted an online survey on behalf of Breakwater Strategy among a nationally representative sample of n=1,000 US adults. Fieldwork was executed from July 27 through July 31, 2023. The survey was carried out online. The figures have been weighted and are representative of all US adults (aged 18+).