Over the past 20 years, ESG has evolved from a voluntary, values-driven initiative into a complex framework of legislation, regulation, reporting and compliance.
Once considered a matter of corporate social responsibility and boardroom aspiration, ESG now permeates every aspect of business operations, requiring the navigation of legal obligations across a wide spectrum of environmental and societal corporate impacts.
It spans from climate protection and anti-greenwashing measures to health and safety, consumer rights, anti-discrimination, modern slavery, anti-bribery and fraud prevention.
Regulatory bodies have also expanded ‘non-financial’ oversight into areas such as workplace culture, bullying, harassment and ethical conduct.
This shift reflects a broader societal expectation that businesses not only comply with legal standards, but also demonstrate ethical leadership.
An equally important factor is a desire for transparency, accountability and credibility in any ESG claims to encourage ESG investment, an essential element of the transition to a ‘green’ economy.
Greenwashing undermines trust in ESG, as does a lack of standardised reporting frameworks and universally accepted metrics
The growth of ESG investment was seen as a given, driven by geo-political and socio-economic headwinds. With the benefit of hindsight, 2022 can now be seen as the turning point, with ESG funds in the US for the first time recording net outflows.
This shift was driven by political backlash – particularly from Republican-led US states – and the Russian invasion of Ukraine, which triggered an energy and supply chain crisis and inflation.
These factors and more recent political changes led to renewed investment in fossil fuel industries and a decline in ESG fund performance, which were weighted in other areas.
Investment decisions are inherently complex, requiring a blend of qualitative insight and quantitative analysis. Understanding the recent reversal in ESG investment is challenging, but adverse sentiment appears to fall into two distinct categories.
First, the ideological opposition is largely driven by geopolitical dynamics and the rise of populism, particularly in the US.
Critics argue that ESG investing is politically-motivated and misaligned with the core purpose of commercial enterprise, with accompanying legal challenge that ESG commitments breach fiduciary duties by prioritising non-financial goals.
The attack on ‘woke’ centres on Diversity, Equity and Inclusion (DEI), which is viewed as emblematic of corporate cultural overreach and has led to a wave of anti-ESG legislation, shareholder activism and litigation.
To remain viable in the long term, companies must integrate ESG into their core strategy
The second form of opposition is rooted in concerns over recent performance, as outlined above, and credibility as to ESG claims.
‘Greenwashing’ undermines trust in ESG, as does a lack of standardised reporting frameworks and universally accepted metrics. Without clear definitions and consistent data, ESG analysis remains subjective and fragmented.
Regulatory efforts in the EU and UK aim to establish taxonomies and improve transparency by reporting and disclosures. However, when ESG is perceived solely as a matter of compliance, it risks being dismissed as a cost burden.
This perception fuels calls for deregulation, with proponents arguing that reducing ESG-related obligations will enhance business efficiency and stimulate economic growth.
ESG has thus become highly politicised, with some arguing that ESG represents a ‘woke’ ideology that undermines profitability and breaches fiduciary duties to shareholders.
Others see ESG as a necessary recalibration in response to global fragmentation and uncertainty around environmental and social justice initiatives.
This tension has given rise to ‘lawfare’, where stakeholder class actions, particularly in climate-related cases, are increasingly used to hold companies accountable for ESG failings, and shareholder activists challenge boards’ promotion of ESG-related causes.
ESG should not be viewed as an aspirational add on, but as a foundational element of good governance
Boards often struggle to navigate this landscape, especially during economic downturns when ESG priorities may be deprioritised in favour of short-term financial goals.
However, treating ESG as a binary choice between cause and profit oversimplifies its strategic relevance. A more nuanced approach requires continuous evaluation of ESG factors, recognising their material impact on business performance and stakeholder trust.
To remain viable in the long term, companies must integrate ESG into their core strategy.
This involves identifying strategic and disruptive factors, including environmental and societal impacts, to assess their materiality, seek expert advice and develop management plans that align with long-term success.
A reimagined ESG framework positions it as:
- Integral to the director’s duty to promote long-term corporate success
- A key component of impact management and strategic risk assessment
- Embedded in the design and execution of sustainable corporate strategy
- Overseen within a culture of strong governance and ethical leadership
ESG is not dead; it is a strategic imperative.
Vernon Dennis is partner and head of business advisory at Howard Kennedy
