Managing the ESG Backlash: Why Value Matters More than Values

Some years back, companies began developing strategies around environment, social and governance (ESG) issues to manage risk and drive reputational value – what would seem to be a win-win strategy.

But today, a politically driven backlash to sustainability has left some businesses rethinking their approach. Corporations find themselves caught between two opposing forces and left wondering how to navigate the challenges. What they overlook is that the key to salvaging ESG may be found in understanding the arguments against it.

Where it All Began

If one could pinpoint a moment in time when ESG issues moved into the mainstream of the business world, late 2015 would make sense.

That was the year of the Paris Climate Agreement and adoption of the UN Sustainable Development Goals (SDGs). Both frameworks articulated a roadmap for advancing societal challenges. And both were publicly celebrated by the business community, with major corporations eagerly announcing their own commitments to advance progress on a shared vision where capitalists and activists worked together to build a better world.

The concept of “ESG” had been developing for many years prior to Paris, led by NGOs and socially responsible investors who pushed companies to look at how non-financial metrics may have a material impact on companies and therefore should be properly managed and disclosed. But in the years after 2015, ESG moved to center stage. Sustainability reports became the norm, BlackRock asked companies to articulate a societal purpose and the World Economic Forum issued a manifesto on stakeholder capitalism.

The Backlash Begins

Yet amid the forward march of sustainability, seeds of a backlash were already being sown. The dramatic rise in ESG happened to coincide with an era of increased political polarization that was touching all facets of society. Many corporate sustainability priorities – such as climate change or DEI – happen to also be issues that straddle a fierce ideological divide. Fused with a reaction to broader trends in culture and academia, anti-ESG sentiment quickly grew among policy makers and stakeholders who argue that companies are stepping out of their lane.

Value vs. Values

The central thesis of their argument is that corporations are too focused on advancing a “woke” agenda rather than on maximizing shareholder value. This argument raises more than just reputational concerns for companies who are legally bound to their fiduciary duty. Supporters of the ESG movement argue that their interests are material, not ideological. Addressing issues like climate change, they say, is a matter of long-term risk management.

But the anti-ESG argument lays bare a vulnerability many companies are discovering. Businesses are touting their embrace of ESG, but they are failing to effectively communicate its benefit to the bottom line. In simple terms, it’s about value vs. values. Reconciling the gap between these two can help companies navigate the storm without throwing ESG overboard.

Because when it comes to ESG, companies have done great work articulating their values. This includes talking about being a good environmental steward, prioritizing diversity and inclusion, supporting human rights, and addressing gender inequities. Companies speak of fairness, justice and building a business model that embraces all stakeholders.

Unfortunately, many companies have failed to make clear how any of this adds to a business’s overall value. Maximizing shareholder value is, to reiterate an earlier point, the legal obligation of a publicly traded corporation and the fiduciary obligation of company leadership. It is likely that all businesses will say they are doing this anyway, and that it is indeed their primary objective. But the failure to connect their business value to their ESG values has left an opening that the anti-ESG crowd is exploiting with full force.

Two Steps Every Company Should Take

How could companies respond to the current backlash? Burying one’s head in the sand or periodically renaming ESG initiatives to something less offensive will only get you so far. Instead, businesses should take a proactive approach, enabling them to better control the narrative on their own operations. This should start with the basics:

Materiality Assessment: Instead of simply relabeling their ESG efforts, companies should accelerate the original end goal of sustainability in the first place: achieving full integration with company operations. This might require an initial reassessment of a company’s sustainability objectives. Materiality assessments can be a helpful exercise to determine ESG focus areas – and they can help justify any rearranging that might need to be done to align with business priorities.
Communications Audit: It is also important to assess company goals and make clear in external publications – such as sustainability or annual reports – how these goals advance the business’s broader objectives. Corporate communications should prioritize connecting ESG issues to the bottom line, long-term growth and risk management.

Light at the End of the Tunnel

Because of the current political environment, the ESG backlash is not likely to go away. The key to success is not just how ESG is labeled, but how it is framed and how it is demonstrably connected to the bottom line. Seeing crisis as an opportunity may be an old adage, but it has stuck around for a reason. Companies that use this moment to accelerate ESG integration into their business and clearly communicate the benefit to the bottom line will be best positioned to come out the other side.