ESG: should we use the acronym or not?

More than just understanding semantics, we need to deeply understand the importance of this agenda and continue acting with consistency and depth.

When I started working in sustainability two decades ago, the acronym ‘ESG’ was rarely used. In fact, not even the word ‘sustainability’ was in use. The most used expression in the companies was “social and environmental responsibility”. The acronym ‘ESG’ (environmental, social and governance) appeared in 2004, in a joint publication by the World Bank and the UN Global Compact called “Who Cares Wins”. In an interview a few years ago, the authors explained the reason: “We ended up combining the “E”, the “S” and the “G” because we saw them all as important elements that were not being considered efficiently by the traditional financial analysts.”

Therefore, there was already the intention of approaching the financial sector when the acronym was created. ‘ESG’ began to be widely used mainly by international investors, who questioned their concerns about ‘ESG factors’ in strategy and management. During the pandemic, the acronym gained notoriety and left its niches. After all, we have come to ?realize - ?through pain - that the world is interconnected: a health/social issue related to the environment triggered the lockdown of the economies. ESG has become the “most famous acronym in the galaxies”, as I often say jokingly. But it is a serious joke. When a boom of such magnitude happens, there are positive and negative consequences beyond the pendulum effect. Any exaggeration or excess tends to cool down over time.

The positive side of this ‘boom’ is that this agenda gained visibility and attracted the attention of leaders who had not yet addressed the issue. It started being part of the conversation circles and rooms of CEOs and Boards. It became the subject of podcasts, courses, articles. This made it possible for us to disseminate the risks and opportunities around these issues more widely.

Several other movements boosted this moment, such as the devastating effects of climate change, new regulations and self-regulations, commercial barriers and incentives and pressure from different stakeholders. Truth of the matter is, ‘ESG’ is about changing the world model. It is about realizing that we will need to change the energy matrix, that we will have to decarbonize the economy, that it will be imperative to look at inequalities. All these and other related factors are interconnected. However, we are just beginning to build this new reality in a structural way. But what about the traditional forces still in use? Either they prepare for the transition, or they react against it.

The second alternative above is the basis of the American “AntiESG” movement, which, as the name suggests, works against the agenda. I wrote about this in the article “Anti-ESG or Pro-ESG? That’s not the point”, in October 2022. This discussion has been going on more and more intensely, to the point that the acronym has become “persona non grata” in some regions nowadays. The first prominent actor to stop using the acronym was BlackRock, the largest global asset management company, with around US$9 trillion under management. In 2023, its global CEO, Larry Fink, declared that the term had become “too politicized”, and that his company would no longer use it. However, this has not changed BlackRock's policy of using these criteria in its allocation of resources, products and services.

Additional data: according to the “KPMG 2023 CEO Outlook” survey, 35% of the CEOs interviewed stated that they had changed the language they use to refer to ESG, both internally and externally, reflecting a “change in the dialogue on this topic”. On January 9th of this year, The Wall Street Journal published an article with a powerful title: “The Latest Dirty Word in Corporate America: ESG”. It states that “many CEOs emphasize that they continue to follow the sustainability commitments they made years ago – even if they no longer talk about them publicly with the same frequency.”

This is the point. I would be very concerned if companies, investors, managers were failing to consider environmental, social and governance issues. It would be reckless and a setback of unpredictable proportions. But in most cases, this is not what we're talking about. And it is worth noting this is an essentially North American phenomenon. In Europe, it is not even a topic. Even so, exponents of the old world get involved because, after all, we cannot ignore this debate. London Business School professor Alex Edmans, for example, has just published a paper proposing the use of “Rational Sustainability” instead of ESG.

I wonder: do we need a new term? In my opinion, no. What we need is a robust socio-environmental and governance action, with goals, indicators, strategic actions and a vision of the future. We do not have time to waste on fads. I support the end of the acronym ESG or any other denomination because the day will come when such factors will be so embedded in legislation, practices and policies that we will be able to give up specific denominations. We are heading there, but there is still a long way ahead.

So, how should we name this area/agenda? Whatever makes the most sense for your company culture. Define your line with a consistent rationale, which will make you feel confident to defend it if necessary. The most important thing is to deeply understand this context. When the acronym ESG was at its peak, a professional told me: “Now we’ll have to create an ‘ESG’ area.” Interesting thing is, they already had a well-established sustainability structure... Let's move on!