After a wave of criticism, what’s on the horizon for ESG strategy?

Companies must prepare to be tested over environmental and social initiatives amid a noisy backlash and legal challenges

After several years of expanding initiatives and acrimonious debates over environment, social and governance (ESG) issues, there is a re-examination of the effectiveness of strategies for advancing or opposing the current ESG agenda. For example, commenters such as The New York Times’ Ross Douthat question whether “peak woke” is behind us, at least in non-academic institutions.

Where does the ESG debate stand right now? What’s new on the ESG agenda? How should corporations rethink their current strategy?

The current state of play

Five factors highlight the current status of the ESG debate:

• When confronting political and cultural wars, and consumer boycotts against prominent brands, many corporations have backtracked or are remaining silent (“greenhushing”) about their previous ESG commitments. Chief among them have been the large, global asset management firms and other financial institutions. Vanguard supported a mere 2% of environmental and social proposals from shareholders this year, while endorsing 94% of proposals recommended by company management. BlackRock, the world’s largest asset management corporation, endorsed about 7% of ESG shareholder proposals within the past 12 months, a decline from 2022 when it supported 22% of shareholder petitions and in 2021 when it recommended approximately one-half. More broadly, companies have dramatically reduced their mention of ESG issues during quarterly earnings calls. For example, from April 1 to June 5, executives at U.S. companies raised “ESG,” “DEI” or “sustainability” on 575 earnings calls, a decline of 31% from the same period in 2022.

Companies across business sectors have no desire to become target practice for right-wing activists, and they monitor with trepidation the experiences of Bud Light, Disney and Target brands.

• There continues to be significant confusion on how to evaluate sustainability performance. This confusion stems from several factors: incomplete and inconsistent information provided by individual companies, thus inhibiting intercomparability of data and performance across companies and sectors; inability of organizations that conduct performance ratings to develop more common methodologies; lack of standards for evaluating the ratings agencies themselves; and an absence of clarity about what ESG ratings actually communicate to investors, regulators and consumers.
• Evidence of corporate pullback in ESG and DEI commitments is anecdotal, not systematic. Companies across business sectors have no desire to become target practice for right-wing activists, and they monitor with trepidation the experiences of Bud Light, Disney and Target brands. There is anecdotal evidence of diversity, equity and inclusion (DEI) positions and budget reductions at individual corporations. For example, National Public Radio reports that, since July 2022, DEI job postings have declined by 38%. In contrast, KPMG reports that 45% of U.S. chief executives attest that ESG programs benefit their financial performance, an increase from 37% in the prior year.
• While successful in some individual states, the anti-ESG movement is struggling on the national stage. Anti-ESG initiatives in predominantly conservative states such as Florida, Texas and West Virginia draw disproportionate media attention, but such activism has not set a nationwide agenda. A major reason is that public support for environmental protection, LGBTQ+ rights, reproductive freedoms, preventing gun violence, voting rights and other issues remain strong. Even many conservatives regard specific anti-ESG proposals as too extreme on such issues as abortion. While anti-ESG forces are well-funded with dark money from individual companies, business coalitions and foundations, pro-ESG supporters have proven successful in winning ballot initiatives in states as politically diverse as Kansas, Ohio and Wisconsin, thereby expanding public awareness and participation in the debate.

ESG has increasingly transitioned from being an insiders’ debate among asset managers, industry lobbyists and sustainability professionals to one that now embodies a broadening public conversation.

• ESG is a reflection in the mirror of civil society. ESG has increasingly transitioned from being an insiders’ debate among asset managers, industry lobbyists and sustainability professionals to one that now embodies a broadening public conversation. Several major characteristics of this conversation include: connecting an expanding transparency with pressure for greater accountability of public, private and nonprofit institutional performance; supporting a greater role for government to protect the social safety net, public health and the environment; and using widely accepted public values such as support for reproductive rights and environmental quality as a lens for evaluating the relevance of individual policy debates. This transition of ESG from primarily an insiders’ conversation to a discussion across our various public squares has major implications for how government, the private sector and civil society effectively participate and build credibility for their own future ESG strategies.

What’s next on the ESG agenda?

A crowded ESG plate is getting fuller as the unmet needs and conflicts within civil society continue to propel the next set of issues for debate and, hopefully, resolution. Here’s what’s unfolding over the next several years:

• ESG corporate reporting requirements will continue to expand. The financial risk-related climate reporting regulations from the U.S. Securities and Exchange Commission have yet to be issued. Their provisions, however, have already been eclipsed by a new climate law enacted in California that would require U.S. companies doing business in the state to annually disclose their greenhouse gas emissions, including Scope 3 (omitted in the SEC’s proposed rule) beginning in 2027. Significantly, large companies such as Apple and Microsoft endorsed the legislation.

  Beyond climate change, there are new requirements for human rights reporting and mitigation across business operations and supply chains in the European Union’s Corporate Sustainability Due Diligence Directive; a new mandate for sustainability reporting and third-party audits that capture “double materiality” (impacts of sustainability risks upon the firm, and the firm’s effects upon people and the environment). Nascent efforts are underway in the U.S. and elsewhere to develop reporting frameworks to address biodiversity and nature, global plastic waste and DEI.

• ESG issues migrate to the supply chain. Various factors are driving companies to include their suppliers in ESG initiatives. Large companies that have committed to significant greenhouse gas reductions by 2030 and beyond (see the 1-gigaton goals of Trane Technologies and Walmart, for example) cannot achieve these results absent the participation of their major suppliers and other business partners. There are also substantial business and reputation risks to business customers who currently lack information on the ESG performance of their suppliers. The emergence of new information technology platforms has enabled greater interactivity between companies and suppliers to design more common reporting metrics and institute more frequent data exchanges as a means of business value co-collaboration.

Well-funded critics of DEI are advancing a series of lawsuits challenging the legality of diversity in parallel with political efforts by state officials and advocacy groups.

• DEI opponents are racing to the courthouse. In the wake of the U.S. Supreme Court’s June decision to strike down race-based affirmative action programs in higher education, opponents of DEI are accelerating a legal strategy to extend the court’s reasoning to other institutions, including business. Preliminary counsel from academic scholars and law firms advises companies to: avoid explicit race-based hiring or promotion; examine the existing language in corporate policies and practices (including training materials); evolve beyond DEI programs that specifically target certain population groups; and examine the language of a company’s DEI goal(s). Well-funded critics of DEI are advancing a series of lawsuits challenging the legality of diversity in parallel with political efforts by state officials and advocacy groups. In July 2013, 13 Republican state attorneys general wrote to Microsoft and other Fortune 100 companies urging them to re-examine their DEI policies and threatening “serious legal consequences” to firms still using race-based employment criteria.
• Social challenges that are not environmentally related continue to emerge. Such is the state of polarization in American (and increasingly Western) society that companies are increasingly (and reluctantly) drawn into intense controversies that question where ESG boundaries actually exist. Social conflicts over immigration policy, local school board monitoring of books that children are allowed to read, endorsements with controversial athletes or celebrities, and support for more sustainable lifestyles all become fodder for activist campaigns to return America to a whiter, more paternalistic social structure and values reminiscent of the 1950s.

ESG challenges have migrated from the need to respond on an issue-by-issue basis to embedding themselves into the core of a company’s business purpose and values

Rethinking corporate strategy

The expanding scope and impacts of ESG issues are transforming corporate strategy in two fundamental ways: ESG challenges have migrated from the need to respond on an issue-by-issue basis to embedding themselves into the core of a company’s business purpose and values; and corporate responses to ESG are no longer about whether to merely engage internal and external stakeholders, but how best to select and strategically manage major ESG issues relevant to the business.

Adapting to these transformations requires that companies better prepare themselves in the following ways:

• Periodically conducting a strategic forecast for emerging issues/polarizing topics that have significant potential to disrupt or create opportunities for brands, markets and operations.
• Educating directors and C-suite executives to understand ESG issues and the societal dynamics that propel them.
• Preparing specific goals, metrics and response plans for major ESG challenges (current and emerging).
• Identifying when to publicly comment/advocate on an ESG issue, and knowing what messages to communicate.

As ESG issues rise in significance, propelled by a politically polarized civil society, companies should expect that their products, brands and policies will be tested and that they will be drawn into contentious debates. Given the current ineffectiveness of government and other organizations to resolve societal conflicts, the risk of a growing militancy (including violence) aimed at businesspeople or assets cannot be ruled out. Now is the time to better prepare for such possibilities.

This article originally appeared on GreenBiz.com as part of our partnership with GreenBiz Group, a media and events company that accelerates the just transition to a clean economy.