You don’t have to look far these days to find evidence of large corporations putting some distance between their brands and three words that are suddenly proving somewhat controversial to say out loud: environmental, social and governance (ESG). According to one analysis, ESG-related public statements made by large financial sector companies declined 20% year-over-year through the third quarter of 2023. BlackRock, the world’s largest asset manager, which is a pioneer in the field of sustainable investing, has stopped using the acronym altogether, choosing instead to now call its approach “transition investing.”
It’s easy to see why. Amid a surge in scrutiny of so-called “woke capitalism,” U.S. mutual fund clients withdrew $13 billion from ESG funds last year, some 150 anti-ESG bills were introduced by U.S. lawmakers so far in 2024 and, according to a report from ISS Corporate Solutions, 13% of shareholder proposals submitted for this year’s proxy season are focused on countering ESG initiatives. As a result, many companies are adopting the practice of green hushing, whereby they de-emphasize sustainability initiatives in external communications, or green stalling, in which they defer any discussion of sustainability initiatives until it feels safer to do so – or at least until after proxy season.
Sustainability-Focused Regulations Keep Coming
But don’t let the shifts in disclosure strategy or euphemistic new terminologies fool you. The acronym itself may be getting downplayed, but the core principles of corporate sustainability that underpin environmental, social and governance initiatives are not going anywhere. In fact, this year will bring the most rigorous corporate sustainability disclosure requirements ever, and the level of regulatory scrutiny into corporate approaches to the climate, worker safety and human rights is increasing rapidly.
In addition to the European Union’s (EU) Corporate Sustainability Reporting Directive (CSRD), which officially took effect this year, the EU Corporate Sustainability Due Diligence Directive (CS3D), which after stalling for several months is still being negotiated, and the international standards for corporate sustainability disclosure on climate-related risks introduced last year by the IFRS’ International Sustainability Standards Board (ISSB), the U.S. Securities and Exchange Commission has just today adopted rules to enhance and standardize climate related disclosures for investors.
Whether or not sustainability still resonates in quite the same way with investors, it is certainly top-of-mind for regulators, so businesses will not be able to stay quiet on the topic forever.
Separating the Hype from the Facts
The real challenge companies face now as they walk a tightrope between regulatory compliance requirements and investor scrutiny is divorcing themselves from the emotion and political connotations of ESG. Instead, they need to link their sustainability initiatives to quantifiable business metrics. We are past the point where feel-good corporate statements about “doing well by doing good” can support a sustainability strategy. In fact, in the current environment, that kind of Pollyanna stance would almost certainly backfire. Companies need to show proof, by-the-numbers, that connects their sustainability strategy to real-world business risks and opportunities – proof that can be independently assured and verified.
For example, sustainability initiatives focused on the reduction of greenhouse gas emissions should be accompanied by hard facts about potential business risks. These risks should run the gamut from evaluating potential impacts of a do-nothing approach through the transition phase all the way to achieving proposed targets. Likewise, corporate efforts to address human rights issues in the global supply chain, or to improve worker safety in industrial plants, should be accompanied with concrete evidence illustrating how these efforts are improving the bottom line, contrasted with the impacts of how not taking action will impact the same bottom line.
More often than not, the backlash against ESG is driven by frustration on the part of investors, politicians and commentators with what they perceive to be distractions from a business’ fiduciary responsibility. For the businesses caught in the middle, juggling regulatory obligations, public perception and responsibilities to shareholders, the answer is not to hide from ESG and sustainability – it is to treat it like the business challenge it is, and systematically take steps to driving improvement. The consequences of hiding from it may very well lead to, if not the death of a business, the strong possibility of becoming an ailing one.