How to move beyond the anti-ESG backlash

As businesses navigate the storm-lashed landscape of corporate environmental, social and governance (ESG) responsibility, it’s worth reviewing the transformations that have taken place in the year since I wrote for the World Economic Forum on the evolving boardroom ESG agenda. Today, boards’ attitudes to ESG issues are not simply evolving; they’re undergoing a profound metamorphosis.

In my 2022 article, I discussed the changing dynamics of ESG in corporate strategy. At the time, ESG had already seen a significant promotion from peripheral topic to strategic imperative for many businesses. But in 2023, its position has destabilized. For the boardroom, it has become a subject that is not only essential but contentious. The emphasis placed on the need for sustainability has caused a commensurate backlash – an anti-ESG movement that (wrongly) believes a focus on better business must automatically result in worse profits.

This is in part due to ESG’s mainstream profile attracting greater scrutiny, and some critics have bundled it up with the wider, increasingly polarizing backlash against the all-encompassing “woke” agenda. It has reached the point where BlackRock CEO Larry Fink, who has spearheaded the need for businesses to embrace stakeholder capitalism over a shareholder-centric approach, has abandoned the term, describing it as being weaponized by right-wing groups who conflate ESG with a liberal agenda. This rhetoric, alongside weakening political commitments such as governments backtracking on net-zero targets, has given boards an opening to reduce their commitment to sustainability.

But instead of abandoning ESG, directors should be doubling down. The negative noise around the subject merely highlights the need to focus on action rather than comms; replacing virtue-signalling with concrete links between ESG, strategy and tangible deliverables that drive value – such as energy efficiency, supply chain innovation and even the use of AI to incorporate sustainability in project management. A clear, cost-driven approach will help to appease investors whose enthusiasm has been soured by the under-performance of some ESG funds.

Greater simplicity in ESG regulation will go a long way to reassuring the doubters. One of the most notable developments over the past year has been the surge in new and stricter legislation and standards relating to ESG by governments and international industry bodies, compelling businesses to adapt swiftly or face severe consequences. Now there needs to be a reduction in complexity and increase in consistency as part of the move towards comprehensive, global ESG regulation. This in turn will enable functional compliance in the way organizations operate.

Alongside simpler regulation, ESG reporting needs greater transparency, so that shareholders have more visibility of and confidence in companies’ ESG efforts. This need for clarity has already transformed voluntary ESG reports from token gestures of commitment to tools with which companies can demonstrate their progress on sustainable practices. The next step is demonstrating to investors, consumers and employees how this is resulting in a positive business impact.

One noteworthy development catalyzing the metamorphosis of corporate ESG behaviour is the changing composition of boardrooms worldwide. Companies are recognizing the value of having ESG expertise represented at the highest level of governance, rather than limited to a single sustainability specialist within the organization. Heidrick’s research shows that ESG-savvy boards are becoming more common, as the ability among directors to navigate these challenges is ranked as an asset by board selection committees. This greater understanding of ESG issues at the highest level should also help engender a sense of personal responsibility and moral duty among corporate leaders.

Overall, these developments signal a more mature, considered alignment between business purpose and ESG initiatives. Companies able to look beyond the pursuit of profit at any cost will recognize that their long-term viability is inextricably linked to their ability to address environmental and societal challenges. Sustainability should be positioned as a competitive advantage, with businesses making ESG-driven decisions that underpin investor confidence, customer loyalty and employee satisfaction.

There’s still a great deal of work to be done, of course. The metamorphosis of the boardroom approach to ESG is an ongoing and transformative journey. But a significant change has already occurred: Whatever term is used for it going forward, ESG is an agenda-topping concern. It is no longer about mere compliance, but about embracing sustainability as a means to drive innovation, build business resilience and foster a brighter future for all.