Is this the end for ESG?

Pokemon.

Lesbian birthday cakes.

And… ESG.

What do all these things have in common? 

I could happily stop here, open up comments and enjoy seeing where your imaginations take you! But the work never ends, so here we go: all of the above have fallen victim to that implacable meat-grinder of good intentions, America’s culture wars. 

An American Civil War

ESG is just the latest in a long line of noble victims of this toxic political culture. (Let’s remember that, despite evangelical Christian outrage over Pikachu’s implicit support for the evolution agenda, Pope John Paul II was good enough to give the franchise his “full blessing.”) But this latest pain point for climate-conscious executives is showing no signs of going away.

Larry Fink claims that Republican State Treasurers, caught up in an anti-ESG crusade of their own devising, withdrew around $4bn from BlackRock funds in 2022 – and the world’s largest asset manager responded with new language recognising the political risk of identification with ESG in their public filings. They are not alone: T Rowe Price, State Street, Carlyle and others have also included warnings about “divergent” or “conflicting views” on ESG posing a material risk to fundraising and revenues. Given that President Biden wielded his veto over a Congressional bill to ban ESG investment for public pensions last year, such language is starting to look unduly modest. 

Language, ethics, and politics in 2024

Where is this all going in 2024? The new year brought one interesting clue, as covered in this widely-shared Wall Street Journal article: some big firms are dropping the term altogether. From websites and committees to publications and job titles, ESG is seen as a counterproductive label for an activity that most organisations remain committed to. They are replacing it with proxy concepts such as ‘responsible business,’ eerily similar to the CSR acronym which preceded ESG in the first place. What are we to make of all this?

One important take came from Alison Taylor, Clinical Professor at the NYU Stern School of Business and author of Higher Ground: How Business can do the Right Thing in a Turbulent World. She pointed out that ESG’s champions invited their own demise by declaring it an apolitical project – nothing but an extension of Friedman-esque business logic. That was so plainly a sleight of hand that it undermined the credibility of ESG from the start, particularly on the right. As Professor Talor puts it:

“Here's the thing. In a more transparent environment, corporate behavior is risky precisely because it is perceived as *ethically egregious*. Also, consider how partisan it actually is to object to Amazon warehouse workers being forced to stand next to a dead body all day, or Hertz having its customers arrested, or Boeing colluding with regulators so its crappy 737s keep flying."

Obviously, what it takes to be a responsible business is still controversial, political and contested. These debates aren't going away, whether we use the term ESG, sustainability, or corporate responsibility. But, let's have the damn debate! Everyone acting like they are rational actors and insisting ethics isn't relevant is a huge, huge, huge part of the problem.”

The end for ESG?

At the core, this argument is spot on. Pretending that ethical tension can be magicked away by rational analysis has long been the Achilles heel of those social constructions – ‘economics’ primary amongst them – which claim the mantle of objective science. We shouldn’t pretend otherwise. 

That holds an inconvenient truth for left-leaning climate activists: yes, we can dismiss climate deniers on the basis of the reality of the science; but the moral position of those who disagree with us on how to address sustainability cannot be dismissed under the rubric of rationality. There is no choice but to engage, in good faith, in a genuine ethical debate. In other words, there is no way around doing the true work of politics.

There are two other points worth exploring here. First, the word ‘transparency’ does a lot of work in the quotation above. Yes, ESG has its problems; but we mustn’t throw the baby out with the bathwater. It has made an incredible contribution in focussing awareness and pressure on the need for corporate transparency, whilst also generating standards and frameworks of disclosure and reporting that enable firms to meet this need. I only hope that any strategic relabelling doesn’t reset the clock or undermine this progress towards building the architecture of transparency that is so important in the transition.

Secondly, as much as the West generally takes its lead from the US on business practice, I believe the ESG culture wars will not prove a popular export. The rest of the world – led as always by Europe, but increasingly met by enterprises in China and the South – will continue to see ESG as the generational opportunity it truly is, whilst doing their best to mitigate its unique risks.

Just as the ESG dilemma for domestically-focussed firms in showing up in US corporate reports, loyalty to the term remains amongst many with a more globalist perspective. Here is the position in KKR’s latest report:

“If we do not successfully manage ESG-related expectations across these varied stakeholder interests, it could erode stakeholder trust, impact our reputation, and constrain our investment opportunities. In addition, investors may decide not to commit capital to future fundraises as a result of their assessment of our approach to, and consideration of, ESG matters.”

Ultimately we may end up seeing a Balkanisation of language as politics bites. But real climate action exists in the physical world, driven by political compromise, market rules, and investment decisions. Whether we call it ESG or something else, we mustn’t let another culture war fracas derail that earnest work of making sustainability a reality. 

illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.