Amidst ESG Backlash, Companies Should (and Are) Staying the Course on Sustainability

Executive Summary

Recently, a mix of economic and political factors have created a challenging environment for companies committed to just and sustainable business. Business faces a political backlash arising from partisan attacks on so-called “woke capitalism,” particularly in the US, as well as economic concerns related to inflation, potential recession, and the prospects of an acute energy crisis in Europe.

While business, investor, and consumer momentum for just and sustainable business remains strong, this fraught context presents new questions and complexities.

"Let's be clear: Applying the lens of ESG is not a mandate for how to invest. Nor is it an endorsement of a political position or ideology," said CalPERS CEO Marcie Frost. "Those who say otherwise are advocating for investors like CalPERS to put on blinders... to ignore information and data that might otherwise help build on the retirement security of our 2 million members."
—Pensions & Investments

Some of the pushback on ESG raises legitimate questions about the gaps between ambition and action and between communications and delivery. Many remain confused about what the dominant terms (“green,” “ESG,” and “sustainable”) mean, particularly with respect to what constitutes a green investment fund. Meanwhile, emerging legal requirements remain fluid and are not fully synchronized between jurisdictions.

When it comes to the anti-ESG movement in the US however, political posturing is a major driver, most often based on flimsy arguments (“ESG will wreck the economy and destroy jobs,” “political correctness run amok”). We should reject these misguided and cynical arguments. Some companies may prefer to stay out of the fray, but they will find that doing so could enable damaging narratives to take hold.

Indeed, this is no time to pull back from just and sustainable business or from arguments that ESG is either too controversial or unaffordable. Commitments to combat the climate crisis, and to build greater social and economic equity, are an investment in resilient business and a thriving economy, both for today and tomorrow.

Smart businesses will not be distracted by short-term turbulence or cynical political attacks. Smart businesses know that their futures will be decided by how well and quickly they transform to net zero, how well they deliver economic opportunity for all, and increasingly how they push back on groundless and discredited efforts to weaponize ESG.

Latest Developments

• Companies face increased scrutiny about whether they are translating their commitments into action and impact. This is especially true concerning climate commitments, as claims of greenwashing are rising, including through legal actions in Europe and the US on the grounds of misrepresentation to consumers and investors. At COP27, a high-level expert group released a major report with recommendations on how to bring clarity and rigor to net-zero pledges.
• The new Republican Party majority in the US House of Representatives in 2023 is likely to hold public hearings, including compelled testimony by business leaders, designed to undermine support for ESG.

  "You have an insurance crisis that’s going on in Florida and California that’s directly tied to climate,” said Ivan Frishberg, chief sustainability officer at Amalgamated Bank. “To deny climate risk in the financial context at this point is essentially to be a climate denier."
  —Washington Post

• Officials of numerous US states have sued and boycotted companies they view as deviating from proper business practices through their adoption of ESG principles. These attacks have been amplified by coordinated media on so-called “woke capitalism.” In 2022, there are nearly 44 bills or new laws in 17 conservative-led US states that would penalize corporations for ESG factors or other social policies, up sharply from roughly a dozen such measures last year.
• Despite the orchestrated pushback on ESG, investors remain focused on just and sustainable business.
• The proliferation of standards has produced inconsistent definitions of core terms such as ESG, net zero, sustainability, and green. Efforts to clarify (e.g., the EU Taxonomy) and align (e.g., emerging EU, US, and International Sustainability Standards Board, or ISSB, standards on reporting and disclosure) are works in progress. Nonetheless, the drive for universal ESG accounting standards continues to advance.
• There is a risk that short-term economic and energy considerations may inhibit the pace of ESG investments.
   

What Does This Mean for Business?

Businesses are addressing ESG amidst both acute economic and political volatility and longer-term structural changes driven by technological, environmental, and cultural disruption. These pressures add complexity to the business environment. They do not, however, undermine the foundation for ESG adoption.

Overall, the top priority should be “stick to the fundamentals.” This can be applied in the following ways:

• Remain Focused on Strategic Objectives: Concentrate on sustainability as a driver of business value, innovation, and resilience. Businesses understand that an accelerating energy transition is underway, and they are preparing for this transition by using scenarios as called for by the Task Force for Climate-Related Financial Disclosures (TCFD). Underlying drivers, such as consumer and employee interest, remain strong, and sustainability continues to be a source of innovation. 
• Investment for the Future: With evolving frameworks, politicized criticism, concerns over greenwashing, government transitions, and a looming economic and financial crisis, companies may face calls to slow down their investments in ESG.  Some may see this as a moment for "wait and see," or worse, critics may use it as an opportunity for an “off-ramp” from commitments. The fundamental reasons why investments in business models, products, and services that deliver clean energy, circularity, and social and economic equity remain as powerful as ever. Companies that pull back now will become exposed as both societal and environmental conditions change, and those that invest for the future will be rewarded.
• Address Legitimate Questions and Debunk Myths: Much of the backlash is predicated on inaccurate, misleading, or false information. It still is essential to take the legitimate questions seriously, which are addressed through increased transparency on company progress against stated goals, without which credibility and trust in business will decline. It is equally important to debunk arguments based on shaky foundations, such as the idea that ESG undermines financial performance. The temptation is to work away from public scrutiny, which could enable political attacks on ESG to spread.

We focus on sustainability not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients…As stewards of our clients’ capital, we ask businesses to demonstrate how they’re going to deliver on their responsibility to shareholders, including through sound environmental, social, and governance practices and policies.
—Larry Fink, CEO of BlackRock 

• Promote Standards Convergence: Most companies operating in the US and Europe are preparing for rising expectations and requirements regarding ESG reporting and disclosure. We need to ensure that these standards are harmonized to enable consistency and a “level playing field.” Business can continue to support the development of frameworks that provide incentives for long-term value creation. Fortunately, we have an immediate opportunity to do just that as the US Securities and Exchange Commission, the ISSB, and various efforts in the EU continue to evolve. 
• Engage in Public Leadership and Private Diplomacy: It is time for business to push back against the cynical narrative amplified by the political attacks on ESG. As highlighted earlier, we have already seen many companies and business leaders, including BlackRock and Michael Bloomberg, publicly state their ongoing support for ESG and their rejection of all arguments aiming to undermine its credibility. Other businesses should follow suit and also explore “private diplomacy” to combat this thinking, should there be concerns around political exposure arising from public statements.
• Align Lobbying and Trade Association Activities: Simply put, “playing both sides” on sustainability is no longer viable. Trade associations continue to oppose steps taken to advance sustainability in a reactionary manner, and government affairs functions often act in a manner inconsistent with stated sustainability commitments. This duality has lost its effectiveness and credibility and, if allowed to continue, threatens to enable and embolden the voices challenging sustainability for political gain.
• Communicate Strategically: The terms “ESG” and “stakeholder capitalism” have become lightning rods. Rather than using these terms, it is better to focus attention on innovation, risk management, resilience, and planning for the future, all of which depend on a vigorous approach to sustainability, with an increased focus on essential topics like climate change, economic and social equity and opportunity, human rights, and governance, all of which are of fundamental importance to business. 
• Stay the Course on Incentives: Boards and executives also can reinforce progress by continuing to ensure that sustainability performance is part of compensation and accountability structures. The rise in ESG performance as an element of short-term and long-term incentives remains crucial, and by reinforcing these principles and processes, business leaders can ensure that their companies remain committed to long-term value creation for all stakeholders.