The once promising environmental, social, and governance (ESG) path has become increasingly embattled. Initially lauded as a framework for ethical and responsible business, ESG has since faced accusations of greenwashing, with critics questioning the sincerity of companies’ sustainable practices. The appeal of ESG lies in its balanced approach—considering environmental impacts, leadership, and stakeholder interests alongside financial performance. Investors, too, began incorporating ESG metrics into their analyses, hoping to identify risks and opportunities beyond the traditional shareholder-driven model. Yet in some quarters it has instead developed a tarnished reputation with critics like Henry Tricks (2022) arguing that it has become broken, deviating from its original purpose and needing an immediate pragmatic reset. The ESG landscape is rife with contradictions, sparking ongoing debates about the true effectiveness of ESG and the depth of corporate commitment to sustainable practices. Let’s explore these complexities further.
Understanding ESG
ESG has become controversial, but the concept isn’t new. ESG, as we know it, celebrates its 20th anniversary this year. It refers to the three central factors in measuring investment or business operations' sustainability, societal, and governance impact. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance means a company’s leadership, audits, internal controls, and shareholder rights.
Emerging from the early practice of ‘socially responsible investing,’ the term “ESG” was introduced in 2004 gaining prominence when the UN Global Compact published ‘Who Cares Wins,’. This document highlighted ESG factors as key nonfinancial issues that could pose risks to businesses. In parallel, the law firm Freshfields Bruckhaus Deringer published a report commissioned by the United Nations Environment Program Finance Initiative confirming the importance of ESG issues to financial valuation, underscoring its role in leaders exercising their fiduciary duty.
Later, the Principles for Responsible Investment was launched in 2006, creating a framework for institutional investors to incorporate ESG into their investment processes with 63 investment companies with $6.5 trillion in assets under management (AUM) joining.
ESG as a Framework for Change
Ultimately ESG rejects the philosophy that investment should only be looked at from a financial perspective. It systematically accounts for nonfinancial risks such as a changing climate, soil depletion or labor unrest that are material to business operations and their stakeholders. But perhaps the real beauty of ESG is the issue of stakeholderism. Here CEO’s not only consider shareholders and short-term profits in their decision-making but everyone that may have a stake in the success of the firm. This approach doesn’t remove the need to focus on value creation through profits but suggests an alternative pathway for companies to think long-term by having a broader grasp of the actors in their internal and external environment.
These are once again not new concepts. These approaches were common post-world war. It was launched by the 1932 management classic, The Modern Corporation, and Private Property by Adolf A. Berle and Gardiner C. The idea was that public firms should balance the claims of different stakeholders considering government policy. In post-war efforts, it was obvious that to rebuild, companies had to rely on the entire community to economically function. Interdependence was more internal as supplies, operations, and sales took place mostly locally and regionally. For the next 40 years, it was the general approach of big business.
Stakeholder capitalism vs. Shareholder capitalism
As economies got more developed, the role of business became more profit-centric. It was bolstered by the ideals of Nobel prize winner Milton Friedman whose doctrine centred on the premise that
the Social Responsibility of Business is to increase its profits.
These ideals became further embedded in Western countries as globalization expanded business networks inadvertently alienating businesses from societal issues. Labor unions, governments, and civil society stakeholders lost their power and influence weakening the stakeholder model that was being replaced by economic prosperity and the need to be globally competitive.
Shareholder capitalism continues to have a good run but the interconnectivity of the global marketplace and supply chains means that many countries are vulnerable to the same global risks. Many companies inevitably must manage multiple stakeholders to create a profit. Further, the health of the planet and global ecosystem depends on the activities of national and corporate decisions. This is why 181 corporate CEOs of the biggest companies in the US (Business Roundtable) issued a statement redefining the “purpose of a corporation.” They posited that businesses cannot thrive on a damaged planet with unhealthy people. They committed to serving five stakeholders: customers, employees, suppliers, communities (including the environment (HBR, 2024), and a shift to stakeholder capitalism.
While the top global risks in 2015 featured interstate conflict and weapons of mass destruction, the top 2024 global risks feature a world past its limits—the top risks feature issues of ESG such as climate, social insecurity, and the environment. We should note that while most global risks at the surface appear non-financial, they have serious economic consequences. Biodiversity Loss triggered by illegal animal trade costs $2 trillion per year (World Bank,2019). Widespread economic dissatisfaction and mass activism are other issues with financial consequences.
Events such as George Floyd's murder amplified by social media fueled mass indignation in multiple countries. Economic anger also impacts share prices and loss of productivity. Some believe the latter is reflective of the working class rebelling against capitalism. In October 2024, the government of the French Caribbean island of Guadeloupe ordered a curfew after a 24-hour strike left 370,000 people without power (APNews, 2024) and Boeing has recorded a third-quarter loss of more than $7.6 billion due to extended labor strikes (Foxbusiness, 2024). Issues like these strike at the heart of ESG and suggest that ESG management plays a significant role in corporate operations.
There are also issues of company scandals that have unwittingly harmed shareholders due to failures in addressing ESG. They illustrate that profit-centric leadership is a double-edged sword leading to loss of profits.
Past ESG Scandals
There was the Volkswagen (VW) Emissions Scandal due to environmental mismanagement. Known as “Dieselgate,” it erupted in September 2015 and involved the German automaker Volkswagen rigging its diesel engines with software to cheat on emissions tests, leading to a worldwide outcry against the company’s unethical practices and over $30 billion in fines, penalties, and compensation to affected consumers.
Wells Fargo Account Fraud Scandal emerged in 2016, revealing that the bank’s employees had created millions of unauthorized bank and credit card accounts without customer consent, driven by aggressive sales targets and incentives. The scandal resulted in Wells Fargo paying over $3 billion in fines and settlements.
In 2021, Johnson and Johnson announced that the Neutrogena and Aveeno sunscreens contained the carcinogen benzene which forced a product recall and class action lawsuits. Silicon Valley’s 2023 collapse is also viewed as a lesson in failed ESG. There was a failure of SVB’s management to nominate qualified board members and lapsed ethical behavior that was indicative of the corporate culture.
The Contradictions of ESG
Despite its noble intentions, ESG investing and integration into corporate operations often reveal contradictions. While the aim is ethical operation, the gap between public perception and private action can be vast. Some companies tout their ESG credentials while engaging in practices that undermine those claims.
Is ESG truly effective in reshaping corporate responsibility, or is it merely a branding exercise?”
Greenwashing has become an issue across various industries. The term was coined to describe false claims of eco-friendliness and social contributions. For example, firms may invest heavily in marketing their sustainability efforts while continuing to exploit natural resources or neglect worker rights. This “greenwashing” can mislead investors, distort the public, and lead to resource misallocation. This leads to the erosion of consumer trust and can stifle innovation as companies no longer feel incentivized to create impactful sustainable solutions (Lytehouse, 2024).
Greenwashing has been seen in the fashion industry with the launch of “conscious brands” that still contribute to waste and pollution. It is also seen in the oil and gas sector where companies promote a green image while investing heavily in more fossil fuel production. Some organizations believe that ESG initiatives are difficult to measure and monetize which taints their commitment (Buckeyeinstitute,2024). There are many benefits to implementing green initiatives, but the concern is that too many organizations want to reap the benefits of a positive reputation without contributing to meaningful change.
ESG Backlash
There are legal consequences for such actions. In the US, greenwashing can violate the Federal Trade Commission Act. Europe has the Unfair Commercial Practices Directive and Canada has the Competition Act. These are all intended to regulate greenwashing and prevent businesses from giving a false impression of their environmental impact. In 2022, Deutsche Bank which manages $928 billion of assets had its offices raided by police and ultimately proven guilty of greenwashing claims (CNN,2022). Companies like Goldman Sachs and BNY Mellon have been fined for similar reasons (Reuters, 2023). This has led to an ESG backlash. A September 2023 survey by the Conference Board of more than 100 large companies found that nearly half said they had experienced ESG backlash, and 61% expected it to intensify. This has led to another phenomenon called "greenhushing". Companies will voluntarily issue sustainability reports due to regulatory commitments but avoid using the term “ESG” in their public relations.
Silence is Golden!
While 70% of U.S. chief executives said that their company’s ESG programs improve their financial performance, pressure from some investors and advocacy groups has caused companies to change their messaging to avoid misinformation claims. Research shows that investor interest in ESG has cooled down over the past year. The issue has become very political with politicians targeting the Climate Action100+ accusing it of violating antitrust laws (WSJ,2024). Legislation has also been passed to limit the use of ESG metrics. The backlash has caused companies like Goldman Sachs to exit such initiatives to avoid being branded as “Woke” (Economist, 2023).
The ESG debate often centers around idealism versus realism. Proponents argue that strict adherence to ESG principles can drive meaningful change and create long-term value. Critics contend that the current ESG framework is flawed, with inconsistent metrics and standards leading to confusion and manipulation. This divide highlights the complexities of integrating sustainability into business models. Some like Nor Kossovsky believe it has died due to dysfunction and toxicity from investors, fund managers, corporate communicators, and politicians (Directors and Boards, 2023). Whistleblowers claim ESG abuse, corporate communicators greenwash while litigators and politicians exploit and weaponize it. Florida’s governor Ron De Santis stated “It allows companies to inject an ideological agenda through our economy”.
What is the Future of ESG?
“Scratch the surface of most cynics and you find a frustrated idealist — someone who made the mistake of converting his ideals into expectations.”― Peter Senge
The Future of ESG lies in how companies navigate these contradictions. It is a societal imperative demanding a pragmatic and unwavering dedication to creating a better world. Though there is a need for clearer ESG standards and reporting practices, regulatory bodies, investors, and companies must work together to create frameworks that promote genuine accountability and transparency.
Contradictions aside, current and future spenders want businesses to have a “soul”. Abandoning or green-hushing ESG may not be good business. Employees especially Millennials and Gen Zers seek employers that share their values. They will leave employment, stage walkouts, or speak up to support or criticize employer actions on social issues (HBR, 2021). Millennials are the largest living adult generation poised to inherit a significant portion of $84 trillion of wealth transfers from Baby Boomers and Generation X by 2045. Their investment preferences and values-driven approach will shape the future of finance (Riverwater, 2024).
By establishing more robust metrics and encouraging authentic commitments to ESG principles, businesses can better align their operations with their stated values and meet their growing consumer preferences. Millennials and Gen Z are increasingly using their financial power to address pressing global challenges.
According to a Deloitte 2024 report, roughly 63% of millennials are willing to pay more to purchase environmentally sustainable products or services.
Further, a quarter of Millennials (24%) have stopped or lessened a relationship with a business because of unsustainable practices in its supply chain.
A 2024 Morgan Stanley survey revealed that 96% of Millennial investors are interested in sustainable investing, underscoring their continued engagement with ESG strategies.
Is ESG still relevant in 2024?
The journey of ESG from a promising framework to the subject of intense scrutiny reveals the complexities of integrating sustainability into corporate practices. The ESG contradiction debate underscores the complexities of ESG in a rapidly changing world. As investors and companies increasingly prioritize ethical considerations, understanding the nuances of ESG is essential for making informed decisions. ESG has faced accusations of greenwashing but it remains a crucial tool for addressing the challenges of our time. Moving forward, a collaborative approach will be crucial in addressing the challenges and contradictions within the ESG framework, ensuring that sustainability remains a central tenet of business practices.
As we navigate an increasingly interconnected and fragile world, the question remains: Will ESG fulfill its promise as a catalyst for genuine change, or will it falter under the weight of corporate contradictions? The answer depends on the collective commitment of businesses, investors, and stakeholders to uphold the principles of sustainability and transparency.
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