"ESG" was supposed to be a clear way for companies to explain their business decisions around environmental, social and governance considerations. How did the term go off the rails? Plus, the complicated truth of net-zero pledges.
How 'ESG' came to mean everything and nothing
At COP21 in 2015, world leaders emerged with an unprecedented sustainability promise: 196 nations pledged to take on climate change with the goal of net zero emissions by 2050.
This signalled the beginning of the "ESG" movement: a focus on environmental, social and governance issues in business decisions. Across the globe, companies rolled out individual, ambitious campaigns towards net zero objectives; ESG-focused investment strategies ranged, but often included transitions to green energy and divestment from fossil fuels.
US telecoms company Verizon, for instance, committed to generate renewable energy equivalent to 50% of its annual electricity consumption by 2025. French insurance company Axa vowed to cut ties with the coal industry by 2030. And after George Floyd's murder, global companies including Apple, AbbVie, Facebook, Pfizer, Johnson & Johnson and Procter & Gamble pledged a combined $340bn (£279bn) to furthering racial justice causes.
However, in the years since firms announced these splashy ESG commitments, often boosting share prices and bolstering corporate reputations, the term has created more confusion – even trouble – than positive change. In fact, some of those ESG commitments have created myriad problems for executives, says Alison Taylor, a clinical associate professor at NYU Stern School of Business, US. Increasingly, the ESG movement has been labelled as "woke" capitalism, and accused of enabling greenwashing.
As a result, Taylor says that even as businesses continue to issue net zero pledges, they've stopped labelling their business decisions as "ESG". This could spell relief for firms that have faced increasing backlash for leaning into the term while failing to make any substantial changes, particularly in a time of growing public expectations around corporate responsibility.
Many companies are making wide-reaching commitments to not add to the total amount of greenhouse gases in the atmosphere. Operating in a world where carbon dioxide levels are rising, populations globally are experiencing heat records and extreme weather events are becoming increasingly common, some founders are making these moves based on their own ethics. Others are experiencing outside pressure from investors, employees and governments.
This means businesses are increasingly releasing sustainability plans that feature keywords such as "net neutral", "zero- or carbon-neutral". They typically commit to reaching the targets in the next 20-to-30 years.
Net Zero Tracker, an independent group that follows corporate pledges, found that half the world’s largest 2,000 publicly listed companies have a net zero target. In the past 16 months, the number of companies with these aimshas risen 40% from 702 in June 2022 to 1,003 in October 2023. The organisation reports the corporate world is in "phase three" of the transition: they've accepted a climate issue, then made a pledge; now, they're delivering on commitments.
While companies have taken strides to act on their pledges, there are still outstanding questions about the transparency and meaningful steps towards change, leading both consumers and even UN leaders to call for tougher standards and greater corporate transparency. There's optimism businesses can make an impact, but the road to developing and executing on concrete plans may be rocky.
Political backlash against ESG in the US, the relabeling of ESG products, and the underperformance of sustainable funds (inextricably tied to the underperformance of growth funds) since early 2022 have contributed to these outflows.
For some organisations (and investment strategies), the biggest priorities that require the most attention will differ, and ESG measures that benefit one area, e.g. society, could potentially have a negative impact on another.
The backlash against ESG has intensified, yet its issues are no less relevant. Whilst in name, ESG may be falling from favour, in substance, its recommendations continue to drive value, and when well-timed and eye-catching, will engage interest.
Amidst this global trend, BlackRock, the world's largest asset manager, has taken a bold step by transitioning its investment strategy from ESG investing to a broader approach called transition investing. This move has significant implications not only for BlackRock but for the entire financial industry.
The people who do not support ESG are the ones who want to make money.” In a nutshell, “opponents to ESG argue that consideration of factors undermines corporate competitiveness and will lead to lower returns for shareholders,” says Maloney.
As a result, many companies are dropping ESG from their lexicon, distancing themselves from DEI, sustainability and social impact programs — or, even worse, decommitting altogether. For leaders in this space, the work is already hard, and it's going to get harder.
In December 2022, Florida announced that it was taking $2 billion out of the management of BlackRock, the world's largest asset manager (and biggest lightning rod for ESG criticism). This was the largest such divestment thus far. These attacks have been coordinated.
The ESG movement, originally driven by good intentions, has been co-opted by lobbyists, special interest groups and various NGOs, and recent reviews have revealed its lackluster performance in creating meaningful environmental change and have highlighted chronic abuse of flawed methodologies.
An ESG controversy case is defined as either an event or an ongoing situation in which company operations and/or products allegedly have a negative environmental, social and/or governance impact.
The backlash against ESG investing and climate-focused regulations has increasingly spread to Europe, once a leader in ESG regulations. Widespread protests by farmers throughout the EU have been spurred, in part, by sustainability-related protocols that have increased operating costs and reduced profit margins.
Investors increasingly believe companies that perform well on ESG are less risky, better positioned for the long term and better prepared for uncertainty. Companies that realign to the stakeholder capitalism agenda may have a competitive advantage over those that try to return to business as usual.
It refers to a set of metrics used to measure an organization's environmental and social impact and has become increasingly important in investment decision-making over the years. But while the term ESG was first coined in 2004 by the United Nations Global Compact, the concept has been around for much longer.
Socially responsible investing goes one step further than ESG by eliminating or adding investments based solely on a specific ethical consideration. For example, an investor might opt to avoid any mutual fund or exchange traded fund (ETF) that owns the stocks of firearms manufacturers.
Who owns BlackRock? BlackRock is not owned by a single individual or company. Instead, its shares are owned by a large number of individual and institutional investors. The biggest institutional shareholders such as The Vanguard Group and State Street are merely custodians of the stock for their clients.
An ESG controversy case is defined as either an event or an ongoing situation in which company operations and/or products allegedly have a negative environmental, social and/or governance impact.
Executives worry there's an overemphasis on measurement.
achievements like carbon-emissions reduction has become a distraction, some said. Worse, it can lead to so-called greenwashing of a business or investment.
For the last few years, the ESG movement has affected both how people invest and what they buy. Now the acronym (it stands for environmental, social and governance) is becoming a “dirty word.” Companies are scrubbing it from their websites, and CEOs are no longer mentioning it in their speeches.
The global ESG and sustainability reporting focus is shifting from being largely voluntary to a mandatory disclosure landscape. Underpinning this shift is a patchwork of global regulations with various environmental, social and governance (ESG) disclosure requirements.
Introduction: My name is Jeremiah Abshire, I am a outstanding, kind, clever, hilarious, curious, hilarious, outstanding person who loves writing and wants to share my knowledge and understanding with you.
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