The ESG Backlash: Politics, Ideology, and the Future of Sustainable Business

Introduction

The illusion of universal consensus around sustainable development is tempting. Some might, for example, believe that all share a desire to combat climate change, preserve natural environments and ensure inclusive economic growth. However, there are deep and emerging conflicts surrounding the sustainability space, connected both to challenging economic times and the growth of conservative political movements. But sustainability is under fire, with Environmental, Social, Governance (ESG) being a popular target of forces actively undermining efforts to promote sustainable development.

Channeling private capital towards sustainability-related efforts

In recent years, many have perceived a consensus on the need for sustainable development. The United Nation’s Sustainable Development Goals (SDGs) is a good example. The colorful squares reflecting a seeming desire to do all kinds of good has been promoted by politicians, civil society actors, and businesses. And these stakeholders are not only promoting the SDGs in isolation, as much effort has focused on the need to funnel private capital into the green and just transition – in part because of the so-called “finance gap” (Dhanani, 2023).

In short, ESG looks at a company's impact on, and vulnerability to, a range of sustainability issues. Examples of topics covered are GHG emissions, diversity, equity, and inclusion (DEI) status and efforts, and routines related to sustainability, board diversity, etc. One early criticism of ESG was that it was hard to quantify ESG factors, something showing in the broad variation between different ESG ranking agencies (Berg et al., 2022). However, with the motto “don’t let perfect be the enemy of good”, many have tended to proceed despite a lack of quality data, while attempting to improve both data sources and ways to disclose it.

Another conflict, however, has been brewing for some time, and has led to a quite drastic and radical shift in both communication and action related to sustainability related efforts previously associated with the ESG label. And this stems not from the limitations related to data or strong action, but from the idea that ESG – and in essence sustainability more broadly – is not necessarily good, and at least not something corporations should pursue. This is what is discussed as the ESG backlash, ESG pushback, or anti-ESG efforts (Masters & Temple-West, 2023).

Don’t be “good” – greed is good

The conflict over ESG clearly demonstrates that what is sometimes perceived as a consensus related to, for example, the SDGs, is illusory. While many have played along for a while now, the idea of sustainable development and the operationalization of it seen in the SDGs is, in fact, highly controversial in certain circles. While stakeholders in UN processes reached agreement on the SDGs, conservative forces are fighting back in the world of finance. And this goes beyond details related to, for example, diverging opinions on LGBTQ+ people and democracy, as such globally controversial issues are already largely left out of the SDG framework. Those behind the ESG backlash represent a more fundamental opposition to the core ideas that form the basis of sustainable development.

A clear example of what has happened is Blackrock, which lent considerable support to the ESG movement (if we can call it that) by supporting it in annual letters and speeches by CEO Larry Fink (King, 2016). Now, almost 10 years later, Blackrock has abandoned the ESG label and instead speak of “transition investing”, something more clearly environmentally focused and less contentious (Pitcher & Ramkumar, 2024).

But how and why did ESG issues become contentious? It boils down to the idea that what some consider common sense and unequivocally good initiatives related to social good and diversity, for example, is by others conceived as a part of a political and activist progressive agenda. One that is portrayed as deeply inimical to the core values some hold dear, which often have their basis in conservative, capitalist, American conceptions of what is good. For example, The Heritage Foundation exemplifies this opposition, fearing ESG diverts shareholder capital and calling it 'woke corporate capitalism' (The Heritage Foundation, 2021b). This is also personal for investors who fear that their capital "is now being diverted to causes and purposes that you never intended to support “ (The Heritage Foundation, 2021a). The core arguments of recent anti-ESG efforts tends to focus on the following points:

1. Political and Ideological Bias: Critics argue ESG introduces political and ideological biases into business decisions, aligning with a progressive agenda.
2. Impact on Financial Performance: There's concern that prioritizing ESG criteria could detract from a company's financial performance.
3. Regulatory and Economic Concerns: The emphasis on ESG is feared to lead to overregulation, burdening businesses with excessive mandates.
4. Undermines Shareholder Value: It's argued that ESG initiatives detract from maximizing shareholder value, suggesting companies should prioritize profits over broader social or environmental goals.

What’s next for ESG? Four scenarios

So, where does that leave us? As organizations shy away from the label because they fear the wrath of conservative crowds, we are suddenly in a situation in which “greenhushing” (Keter) has become a thing, and where it is now quite ok – even good to talk about maximizing shareholder profits in the short-term rather than engaging in progressive do-good’ism aimed at social justice, just transitions, peace, and such fluffy things.

There are several options on the table, and two key choices worth noting. The first is whether one sticks to ESG as a term. The second is to what degree businesses develop the promotion of sustainable development in the environmental, social, and governance spheres. This leaves us with the four scenarios – or outcomes – shown in Table 1.

The four scenarios have significant consequences for how the world of sustainable finance, and through it business contributions aimed directly at promoting sustainable development, develops in the near future.

Scenario 1 entails reverting to the motto that greed is good, and that short-term shareholder value is not just accepted but the proper goal of corporations. This approach would likely be favored by those who view the push for sustainability as fundamentally incompatible with their business model or ideology. However, it represents a significant retreat from the progress made in recent years toward integrating environmental and social considerations into business practices.

Scenario 2 will according to some be where we’re at today – where ESG is pursued on paper, but largely in greenwashing efforts not combined with strong action. This is a situation that neither those that push back against ESG nor those wanting effective action would be satisfied with. The challenge here is balancing genuine sustainability efforts with the market and political pressures that demand a focus on short-term financial gains over long-term environmental and social objectives.

Scenario 3 occurs if corporations shun the ESG label out of fear for reactions from the anti-ESG actors and pursue “greenhushing” by continuing and developing their efforts aimed at promoting ESG related initiatives through other labels. The difficulty lies in crafting a new approach that is both genuinely committed to sustainability and capable of gaining traction in a skeptical or hostile environment. This could involve rebranding efforts, developing new metrics for success, or even pioneering innovative finance mechanisms that align with sustainable development goals without explicitly invoking the ESG label.

Scenario 4 is one where there is strong pushback against the pushback, so to speak, and corporations and regulators fight to preserve and further develop ESG frameworks and regulations. In the current situation, particularly in the US, this seems like an unlikely outcome, as significant actors have already abandoned the term – making the fight for ESG preservation an uphill battle. Proponents would need to engage in advocacy, education, and perhaps most challengingly, confrontation with deeply entrenched interests that view ESG as antithetical to their principles or financial interests. While it may appear futile given the current backlash, this approach relies on the belief that sustained effort can change perceptions and eventually lead to broader acceptance.

The way ahead

The way forward in addressing the ESG backlash and the politicization of sustainable development requires a multifaceted approach that embraces collaboration, consensus-building, compromise, and an unwavering commitment to sustainable development. To effectively tackle the challenges of climate change, inequality, and resource depletion, it is imperative that businesses, governments, and civil societies integrate sustainable practices. ESG has taken us some way, and if it is abandoned now, there is an urgent need for an alternative.

The journey towards a sustainable future necessitates collective efforts across sectors, highlighting partnerships and fostering innovation. Achieving consensus in today's divided climate is critical, and it calls for recognizing that sacrifices are necessary for the greater good. Compromise is essential, allowing for different priorities and strategies to coalesce around common goals for the long-term viability of our planet.

As we strive for a more sustainable and equitable future, it is crucial to remain patient, persistent, and to actively fight for our common future. The urgency to act is clear, and by standing strong in face of the pushback, we can navigate the complexities of sustainable development and overcome the challenges posed by the ESG backlash.?

References

Berg, F., Koelbel, J. F., & Rigobon, R. (2022). Aggregate confusion: The divergence of ESG ratings. Review of Finance. https://doi.org/https://doi.org/10.1093/rof/rfac033

Dhanani, Q. (2023, Sep 11, 2023). Closing the SDG Financing Gap Requires Collective Creativity. Boston Consulting Group,. Retrieved March 27 from https://www.bcg.com/capabilities/social-impact/expert-insights/qahir-dhanani

Keter. Green Hushing & The Anti-ESG movement. Keter,. Retrieved March 27 from https://www.keteres.com/resource/green-hushing-the-anti-esg-movement

King, E. (2016, Feb 5). Blackrock: World’s largest investor flags up climate risk. Climate Home News. https://www.climatechangenews.com/2016/02/05/blackrock-worlds-largest-investor-flags-up-climate-risk/

Masters, B., & Temple-West, P. (2023, Dec 4, 2023). The real impact of the ESG backlash. Financial Times. https://www.ft.com/content/a76c7feb-7fa5-43d6-8e20-b4e4967991e7

Pitcher, J., & Ramkumar, A. (2024, March 3). Step Aside, ESG. BlackRock Is Doing ‘Transition Investing’ Now.The Wall Street Journal. https://www.wsj.com/finance/investing/step-aside-esg-blackrock-is-doing-transition-investing-now-59df3908

The Heritage Foundation. (2021a, 16 May 2022). Heritage Explains: The ESG Pushback. Retrieved March 27 from https://www.heritage.org/progressivism/heritage-explains/woke-corporate-capitalism

The Heritage Foundation. (2021b). Heritage Explains: Woke Corporate Capitalism. Retrieved March 27 from https://www.heritage.org/progressivism/heritage-explains/woke-corporate-capitalism