In the crosshairs
Soon, however, the overuse of the term began to reveal cracks in the ESG foundation, leading to trouble for many companies after heaps of praise.
In the US, ESG investing has become a political wedge issue with some legislators, like Florida Governor Ron DeSantis arguing that “woke” leftists are using it as a mechanism to prioritise ideology over profits. Texas republicans have pushed for anti-ESG legislation, and former Vice President Mike Pence has argued that ESG investors are trying to achieve in the corporate world what they couldn’t at the ballot box. In the UK, Prime Minister Rishi Sunak has said proposed net zero legislations are a governmental overreach that threatens the rights of British people.
On the other side, ESG proponents are pointing out company failures around sustainability commitments. Desiree Fixler, once the head of sustainability for Deutsche Bank’s asset management arm, DWS Group, blew the whistle on the company for misleading and exaggerating ESG claims in its funds. Financial institutions including Bank of America, Citi and Santander failed to deploy funds for a climate ETF after garnering press at 2021’s COP27 in Glasgow. Netflix came under fire after laying off diverse content and talent. Brands including H&M, KLM, Nike and Samsung have become embroiled in anti-greenwashing litigation.
“I’m somebody who’s widely seen as an ESG advocate, and I have to admit that some of the backlash is quite, quite valid,” says Edmans. “Funds, say, ‘invest in me, I’m going to change the world’, and then they don’t really change the world. And so, this is why some people have now had a backlash against it.”
While some of today’s executives might be inclined to wash their hands of the term, NYU’s Taylor says the next wave of leaders may cling to the broader concept more tenaciously – perhaps without the label.
“I explain to my students that there was a time when business was politically neutral,” she says. But for her students, the notion of a politically detached business is a relic of the past. “They tell me that’s not an option anymore.”
Although her students may not be looking for commitments that are designated as ESG initiatives, says Taylor, they do hold the view that business’ role in society is one that must recognise the movements around them, whether that be diversity initiatives, or divestment from fossil fuels.
Plus, amid climate change and social issues in the globalised world, firms face increased scrutiny around their business practices. Whether companies eschew or lean into the ESG terminology, their investors are increasingly putting pressure on them to act with environmental, social and governance considerations at the forefront – no matter what they choose to call it.