Under fire but here to stay: What’s next for ESG?

With growing controversy around ESG, we are having many conversations with clients and prospects about what’s next for ESG and how they should be thinking about their sustainability programs.

ESG has become highly politicized in the U.S., with at least 11 states passing legislation to fight public investment strategies that consider environmental and social criteria. Earlier this year, the case for ESG was undermined by Vanguard CEO Tim Buckley, who said that ESG isn’t smart investing.

Now a new bill proposed by Republicans - the “Ensuring Sound Guidance (ESG) Act” – aims to restrict ESG investing in retirement funds. Adding fuel to the fire is BlackRock’s CEO Larry Fink, who said that he’s ashamed to be part of the ESG political debate and that he will no longer use the term ESG because it has been politically weaponized.

For some companies, the controversy is causing real business issues. For example, one of our clients is an asset management firm whose clients include European sovereign wealth funds that care greatly about ESG on one hand and US pension funds in states taking an anti-ESG stance on the other hand. With opposing sentiments on ESG, new questions are surfacing:

• Where is ESG headed? Is it possible that ESG is just a passing fad that will diminish under political pressure?

• Was ESG something that only made sense in a robust economy when companies had sufficient resources to implement programs?

• How should we think about ongoing investments in our sustainability program and initiatives?

• Should we move forward with launching a sustainability program or hold off until there is more clarity around ESG?

In the face of anti-ESG sentiment and economic uncertainty, it’s no surprise that companies are stepping back to evaluate their ESG and sustainability initiatives.

For executives and directors who are pondering these issues, it’s worth considering the follow points.

First, the many factors that catapulted ESG to the forefront remain valid issues that can’t be rolled back.

These issues include the shift to passive investing, corporate short-termism, social injustice issues, talent shortages and the generational wealth transfer. Your company’s future will ultimately be in the hands of the younger generations who want to work for organizations, purchase products, and invest in companies that have a strong commitment to sustainability.

Second, money talks, and sustainability and ESG-dedicated funds continue to attract capital.

Conversely, according to a recent Financial Times headline, anti-ESG funds are failing to gain traction in the US. Additionally, Morningstar data shows that anti-ESG fund flows peaked in the third quarter of 2022.

Third, the International Sustainability Standards Board (ISSB) just released its first two reporting standards. 

The standards - (S1) General Requirements for Disclosure of Sustainability-Related Financial Information and (S2) Climate-Related Disclosures - are designed to establish a comprehensive, global baseline of sustainability disclosures that focus on the needs of investors and financial markets.

While the standards are voluntary, (unless mandated by a jurisdiction), investors may play a key role in how companies adopt them. Investors, lenders, and capital providers have long been needing and asking for disclosure standards that allow them to measure sustainability risks and metrics on an apples-to-apples basis.

Finally, the SEC plans to release a series of disclosure rules on a range of issues.

This includes climate and cyber in October 2023, and two new rule proposals that include disclosures for human capital management in October 2023 and corporate board diversity in April 2024. Companies need to be prepared to meet these new disclosure requirements and it’s best to stay ahead of the game.

Regardless of the controversy, data shows that most savvy business leaders still believe that ESG is just plain good business.

According to recent EY survey, 91% of C-suite participants characterized sustainability and ESG as important to their company, and 87% characterized ESG principles as extremely important.  

As with many things in life, the ESG pendulum may have swung too far in one direction before settling back to the mean. Perhaps the best approach is a pragmatic one that focuses on the original intention of ESG, which is creating long-term sustainable enterprise growth and value for all stakeholders.

In our view, any company thinking about walking back their sustainability goals and commitments is risking its credibility, the #1 currency of any corporate leader. Management might also learn the hard way that ESG and an all-stakeholder approach to sustainably growing a business is a competitive advantage in attracting capital, talent, customers, partners, acquisition partners and other stakeholders – in good times and bad.

Please contact us to learn how Financial Profiles can help you build and evolve your sustainability and ESG programs.