ESG Backlash: Pendulum Swing or Paradigm Shift?

We are already well into a decade and a half of what many have described as a paradigm shift, including the authors of a March 2020 article titled “The Age of ESG”, posted in The Harvard Law School Forum on Corporate Governance by Jessica Strine, Marc Lindsay, and Robert Main of Sustainable Governance Partners, where the authors stated:

“Among the major developments in investment management over the past decade, the dawn of the Age of ESG—environmental, social, and governance factors—represents a true paradigm shift in the relationships between public companies and their investors.”

“Investors recognize that ESG factors can influence long-term business performance. As such, many investors now expect ESG factors to be integrated into a company’s strategy and disclosed in public reports. Passive investors are reviewing this disclosure as an indicator of governance quality. Active managers, under pressure to deliver alpha, are focusing on sustainability issues and variables beyond the financial statements in the pursuit of drivers of intrinsic value.”

Since that article was published five years ago many things have changed including, more recently, a notable backlash in parts of North America and elsewhere to corporate ESG governance and ESG-informed investment practices. This raises the question of whether the past decade and a half evidenced a true paradigm shift or just a long pendulum swing. If the former, are we about to experience another paradigm shift away from “The Age of ESG”? If the latter, where are we along the pendulum’s arc?

Backlash Drivers and Tools?????????????????????????

The reasons for the backlash are often not fully articulated. Climate change denial and reverse discrimination-based objections to affirmative action are two areas of specific backlash. More broadly there seems to be a general sentiment that the ESG pendulum has just swung too far, or too fast. Those who feel threatened by such policies are voicing their growing resentment and anxiety. Their concerns may only be about certain aspects, but since they are lumped together under acronyms that cover broad ground, the backlash can over-reach.

This has led opponents to denigrate and politicized the terms “ESG” and “DEI”, imbuing them with very different meanings for different audiences. The terms are now so burdened with distorted meanings, one can question their current usefulness. To be useful, words must have commonly accepted meanings. This is part of why many companies are changing the language they use to more specifically describe their policies and programs, without labelling them with acronyms or changing the program content.

This backlash has manifested itself in a few realms:

1.???? Political: In the last couple weeks, we’ve seen a series of US Executive Orders and new leadership “cleaning house” of climate change, DEI and other ESG policies – where even the language of environment, social and governance concepts is banned. The targets of political backlash are not just government departments and agencies but, in some cases extend to the business world. In Canada there is less-pronounced, but growing, “anti-woke” political messaging and a shift in electorate priorities putting climate concerns behind growing economic concerns, (exacerbated by the adverse impacts of Trump’s threatened tariffs against Canada).

?2.???? Social: We see criticism of ESG and DEI policies on some mainstream media and social media channels, sometimes citing extreme hypothetical examples or blaming adverse real-world events on such policies, without causal evidence.

?3.???? Legal:

-??????? A number of legal decisions in the US have struck down certain aspects of ESG policies and been critical of ESG investment criteria (i.e. US Supreme Court decision, June 29, 2023 in Students for Fair Admissions v. Harvard?ending raced-based affirmative action programs in college admissions and spawning a flurry of similar cases against US corporations, and the January 10, 2025 US District Court ruling against American Airlines that found the company breached its duty of loyalty by entrusting employee 401(k) plans to BlackRock which considered ESG factors in its investing decisions.)

The Capital Markets Context

In the context of capital markets, some of the confusion arises from the dual nature of ESG policy objectives, which are to:

1. Manage material climate and other ESG risks and opportunities that could impact an organization’s financial performance, operations, earnings, physical assets, and other elements that contribute to a company’s enterprise value; and

2. Manage the effects of a company’s operations and actions on the climate, environment, communities and society at large.

It is easy (and for some, convenient) to conflate these two things. In fact, they are interrelated because failing the second objective can create risks and bad outcomes under the first. Critics of ESG claim the second aspect is the main driver for ESG-minded investors and corporate leaders amounting to “social engineering” and that it conflicts with their duty to maximize returns for their shareholders – as if the two were mutually exclusive. Investors and corporate leaders cite the first objective as the main driver but argue that how well a corporation performs on the second objective reduces risks, and increases returns, to the corporation and its investors – thus furthering the first objective.

Regardless of what may considered the main driver, investors still need to assess the ESG risks of a business, whether the business makes it easy or not. In the absence of high quality, transparent, sustainability disclosure, investors will either move on to more transparent investee companies or make conservative assumptions about whatever the company failed to disclose, which may increase the company’s cost of capital from a risk-adjusted demand and pricing perspective.

The recent threat of tariffs by the US has motivated some Canadian exporters to urgently consider diversification of their markets beyond the US. Some of those companies may be subject to internationally aligned sustainability disclosure requirements in those markets. Some may find the customers in those markets use public sustainability information to make product buying decisions. Canadian companies that start now to report under the CSSB’s standards may find it advantageous for doing business abroad and accessing capital from international sources. Delaying and hoping for the best may be a costly strategy.

Similarly, Canadian companies are looking to diversify their sources of capital. In the global competition for capital, the more companies there are providing fulsome sustainability disclosure, the easier it is for investors to skip over less transparent companies to invest in those that do. Companies that provide global baseline-aligned disclosure create more investor confidence in their ability to fully understand and manage their sustainability risks. Canadian companies will not want to be left behind.

The very success of public capital markets in underpinning healthy economies depends on market rules that ensure transparency of business risks and opportunities to enable sound investing and lending. That is why high quality, comparable, decision-useful, sustainability disclosure is not going away. It is subject to the universal and sustainable “gravitational” force of investors’ need for such information.

The Global Trend

A dampening of sustainability disclosure from the ESG backlash is not universal. At the same time as we see pockets of backlash, there have been significant advances in sustainability disclosure standards globally. Most notably, the brisk pace of progress on global adoption of the International Sustainability Standards Board’s (ISSB) sustainability disclosure standards continues, despite a few jurisdictional headwinds. According to the ISSB, 30 countries have adopted, or taking steps to introduce ISSB standards. Those countries collectively represent approximately 57% of global GDP, over 40% of global market capitalization and more than half the world’s emissions.

Why are global baseline sustainability disclosure standards being adopted at such a pace despite the pockets of backlash? The answer is the compelling and, until now, unmet need for a single set of high-quality global baseline reporting standards, (namely the ISSB’s standards, upon which the CSSB’s CSDS 1 and 2 standards are based). These standards provide the consistency, comparability and credibility of sustainability information that capital markets need. At the same time, investee/borrower companies want access to the lowest cost capital they can attract and would prefer to report sustainability information under a consolidated, internationally recognized, standard to reduce the cost and burden of duplicative reporting under the growing “alphabet soup” of alternative reporting frameworks. This momentum is indicative of market forces of “gravity” at work.

Companies also want a level playing field where their domestic and international competitors are reporting on the same standard, so their relative risk and opportunity profiles can be fairly and accurately compared. A level playing field can favour companies in Canadian sectors, like oil and gas, resource extraction and agriculture, that represent their products globally as being amongst the most sustainable of their international competitors. The ISSB’s standards, upon which the Canadian CSDS 1 and 2 standards are based, provide that level playing field for Canadian companies.

Pendulum Swing or Paradigm Shift?

While anti-ESG backlash may or may not slow down mandated sustainability reporting, it can only be temporary. Where regulators leave a sustainability disclosure vacuum, investors, including some of the world’s largest institutional investors, are going directly to listed companies, asking for public sustainability reporting based on internationally recognized standards.

So, are we in a paradigm shift or a pendulum swing? The answer depends on the strength of the underlying gravitational forces described above. If environmental, social and governance risks and opportunities become immaterial or suddenly disappear, then so too will the need for sustainability reporting and we will experience a paradigm shift. That won’t happen. My money is on the gravitational force of investor and lender need for transparency of business risks and opportunities to enable sound investing and lending. That doesn’t go away, regardless of the political or social sentiments of the day.

I don’t believe we are experiencing a counter-paradigm shift. The pendulum may be swinging but it always swings back until it comes to rest at the point of equilibrium. That equilibrium will only be reached when transparent market rules are fully responsive to the needs of fully informed investing resulting in low friction flows of capital to businesses that need it to grow. Like gravity, this is an investment “law of nature”.