ESG has become a blue touch paper topic for businesses, politicians, journalists and campaigners alike.

You would be forgiven for thinking ESG (environmental, social and governance) issues have only become a business catchphrase in the last 5 years, however, it was in fact first mentioned in a 2006 UN report on the principles for responsible investment. This report required, for the first time, ESG criteria to be incorporated in the financial evaluations of companies.

Gillian Tett, founding editor of the Financial Times’s Moral Money newsletter, describes ESG as “the idea that there is life beyond the balance sheet; that businesses historically have tended to focus on shareholders and profit and loss in a very narrow way. ESG looks at all the other factors that businesses need to think about when they look at risks in the world: environmental issues, social upheaval, governance inside the company. It’s about trying to take a wider view of business, rather than the very narrow tunnel vision that dominated in the realm or the era of Milton Friedman.”

The investment debate

Claims that businesses investing in ESG, will play an important role in helping the environment, promote social good, and hold the corporate world accountable have be touted widely. Major investors such as Blackstone Capital have popularised an idea that the answer to a sustainable future runs through ESG and sustainable products.

However, even the former face of the biggest name in ESG investment has come out and said the idea of ESG promoting social good and creating new governance structures to save the planet is intellectually bankrupt and is damaging to the causes it purports to support.  BlackRock’s former chief investment officer, Tariq Fancy, has stated he now thinks sustainable investing is a “dangerous placebo that harms the public interest” after previously evangelizing the trend for the world’s largest asset management firm.

Politics and greenwashing

Politically, ESG has become a party divide matter. In the US, republican politician Ron DeSantis, assailed ESG as “woke” capitalism that prioritises liberal goals over investor returns, harming U.S. companies deemed insufficiently progressive and in turn hindering the wider economy. In Europe, where ESG has arguably advanced quicker in comparison to other international arenas, ESG progression has been hit hard by the Russian invasion into Ukraine. European governments and business have scrambled to balance their green ambitions with new imperatives of energy security.

Criticism of companies either not doing enough to uphold ESG principles or, alternatively, ‘greenwashing’ their ESG credentials has been a popular theme for political and media debate. In 2022 HSBC had a series of advertisements banned by the UK advertising watchdog for publicising tree planting and net zero emissions plans but failing to disclose its financing of fossil fuel projects and links to deforestation. Another example is Deutsche Bank, which is being investigated by U.S. and German financial regulators over whistleblower allegations from Desiree Fixler, the former head of sustainability at the firm. Fixler said the company had made misleading claims in its 2020 annual report that more than one-half of the group’s $900 billion in assets were invested using ESG criteria.

Green hushing

As a result of the political and media scrutiny, and an increasing trend towards lawsuits from green campaign groups and disruptive shareholders, many businesses are now shying away from publishing their ESG credentials. “There is a high degree of scrutiny now around anything to do with professing your sustainability,” said Michael Wilkins, head of Imperial College London’s Centre for Climate Finance and Investment. “Together with the ESG backlash, I think it is scaring a lot of companies.”

The Financial Times reported that 25% of 1,200 companies across 12 countries surveyed will now not publicise their science-based net zero emissions targets; a road map for reducing emissions in line with the goals of the Paris agreement. While this will make it harder to scrutinise the ESG performance of a business, it may also deter businesses from setting sustainable goals and the continuance of a positive trend of businesses engaging with ESG ideals.

Positive outlook

It is likely we will see ESG 2.0 emerge with a new name and enhanced criteria in the next few years. Despite the negative press surrounding ESG, it is undeniable that the underlying principles – to create a more sustainable future for the environment, society and business – are positive.

While green hushing may be a current trend, it is encouraging that business leaders are actively embracing the ESG criteria to better their corporate footprint and investing in technology, people and resources for long term sustainability. ESG may get a new name but its effects and sustainable efforts will continue.