ESG is not dead, it's just in hiding

I read a lot about the "ESG backlash" these days, and that ESG is dead" but is that actually a real thing?

For some years now, companies have been under pressure to be better corporate citizens, and to report back to shareholders on their progress through Envirinmental, Social snd Governance (ESG) and Coroorate Socisl Responsibility (CSR) reporting. 

It's a rather woolly, ill-defined and fraught concept, open to wide interpretations and misinterpretations. The more environmentally-minded often complain that ESG initiatives don't go far enough, or that they amount to little more than window-dressing or greenwashing. 

On the other hand, some sneeringly refer to it as "woke capitalism" and maintain that companies have no business trying to "do good" in the first place. Some may take it a step further, actually disinvesting in companies and funds that they see as overly ESG-conscious. High-profile Republicans like Ron DeSantis and Mike Pence have been very outspoken in their opposition to ESG.

The sum of all this is what is ofren referred to as the "ESG backlash". By some estimates, half of all companies have experienced some kind of backlash relating to their ESG strategies, although it has generally been mild in intensity.

Obviousy, no-one is going to please all the people all the time, but it must be a royal pain for companies trying to thread that needle and walk that tightrope. But how much of a movement is this ESG backlash really? Is it just over-reported? Forbes' 10th annual Business and Politics Study entitled the Shifting Sands of Doing Good in America looked into this issue and it received a mixed but largely pro-ESG reaction.

At a broad level, 79% of Americans believe that companies should act to address important societal issues like climate change and racism. That's a pretty resounding vote in favour of ESG, and it has remained broadly consistent over the last few years. 78% of Americans say that they prefer to buy products that are both environmentally and ethically sustainable, and people have voted with their feet, such that ESG-friendly products have grown in sales by 28%, compared to 20% for products from companies that make no ESG claims. Only a tiny percentage actually wants Congress to investigate or penalize for their ESG practices.

All of the above suggests that the so-calked ESG backlash is actually more of a radical fringe reaction in our increasingly politically polarized society. Corporate executives have been reticent to speak out on the subject for fear of the wrath of angry anti-ESG Republican lawmakers - this has been documented - and some of those lawmakers have actively tried to interfere in or restrict the ESG ambitions of companies. For example, deep red states like Texas, Florida, North Dakota, Montana and Kentucky have tried to block certain companies from doing business in the states because of their ESG stances. 

But it seems those Republican lawmakers may be out of touch with the people they purport to represent, on this issue at least. One study found that 70% of Republicans actually approved of ESG investment and opposed government interference in them, a higher percentage than Democrats.

Be that as it may, companies, particularly the big ones, have gone very quiet on ESG. Just 56 of the companies on the S&P 500 Index now specifically comment on ESG initiatives, down 64% from its peak in the 4th quarter of 2021. But only some of them are actually distancing themselves from their early inititatives.

In fact, more and more companies are signing on to emissions reductions targets and incorporating them into the investment process and corporate strategy; they are just not labelling them as such in order to avoid unwanted attention from anti-woke conservative politicians and organizations, and also from securities regulators (which have now had time to catch up on the ESG boom and adapt international reporting standards to accommodate it), a phemomenon now known as "greenhushing". 

Larry Fink, CEO of BlackRock, who helped bring ESG investing to the masses, comments, "I don't use the word ESG any more because it's been entirely weaponized". But BlackRock is not changing its position on climate change, and it continues to put pressure on its investments to embrace decarbonization. The financial industry is increasing investment in ESG, but it is doing it more quietly.

In Canada, ESG is much less of a hot-button issue. Money continues to pour into Canadian sustainable funds and indexes, and sustainability is still considered an important aspect of a diversified portfolio.

So, the good news is that an awful lot of corporate executives have incorporated ESG thinking into their mindsets, and it has become, to a large extent, part of the new paradigm of doing business, whatever some disaffected GOP politicians may feel about it. Companies can now incorporate ESG into their business practices even if they don't publicize it. Even if they remain silent, through fear of conservative reprisals, their actions can speak louder than words. Like it or not, ESG practices make good business sense, and companies are "doing the right thing" despite the threats of the disaffected right.