Should we forget about ESG?

The term ESG has been under attack in recent months. There has been a lot of noise since a number of US’s states have passed anti-ESG laws, new lawsuits have been filed challenging companies’ ESG-related activities, and some big asset managers and companies seem to be distancing themselves from the term “ESG” itself (see how Blackrock is doing so here and here).

As a result of continued pressure, according to this Morningstar report, global sustainable funds experienced net outflows of US$2.5 billion in the last quarter of 2023, marking the first time they entered negative territory. Having said that, European ESG funds continued to attract new money, and if we look at the full 2023, global ESG funds still gathered US$63 billion.

So, is ESG really going down under these attacks? We doubt so. Maybe the term is falling out of grace to a certain extent, but for investors that have fully understood the idea behind optimizing in more than one dimension (the economic one), we doubt they regret it. As for companies, those that have seen the benefits of understanding how double materiality impacts their future, are unlikely to let it go.

Just yesterday, Boeing announced it is suspending its financial guidance, very likely to focus on safety. It might sound obvious that they do this, since when something happens to an airplane it is a very visible event for the world. It scares all of us who travel by plane from time to time, and so it might be very natural to get behind Boeing’s move. But, when something happens in a factory or when someone eats a product with wrong ingredient specs, it is also just as relevant. Maybe less visible, but relevant. Would investors be ok if companies suspended financial guidance in those instances too? When safety failures are material, would stakeholders support those moves too? And if we double click on this, would a company that is contributing to the likelihood of floodings in 15 or 20 years from now (or even 50) that can risk the lives of thousands of people should spend some time thinking about how they can (and should) fix this?

For those of us that have done many ESG projects and reports, we know safety, environmental impact, product quality (and many other things) are key topics we address. It doesn’t mean we want extreme measures that sacrifice stakeholders’ returns. It just means we want to see companies asking themselves more questions. And sometimes, this might mean providing guidance on key ESG KPIs is helpful even for investors to follow.

There are many interests behind the different positions against and for ESG. But let’s not forget why ESG came into the picture. As this recent WSJ article states, forget the term, but don’t ignore the power of the concept. Companies impact the world, in good ways and bad ways. The world impacts companies, in good ways and bad ways. This double materiality that extends beyond financial metrics is useful when trying to assess the long term value of an organization, or the key risks management should be paying attention to.

Does this mean companies should forget about profits and think only about sustainability? Not at all. But companies should not just go back to optimizing profits alone in the immediate future and forget about the rest. Why? Because it makes business sense to optimize in more than one dimension.

So, as we read about all these attacks to ESG (and of course we do since we find some of the concerns legitimate), we don’t believe this means you should pause or slow down your sustainability efforts. Maybe rebrand them if you think this pressure has had an impact on how your organization is integrating these efforts. But don’t stop.

I hope you found this interesting. As usual, if there is anything we can help you with, or if there is an ESG topic you would like to know more about, please let us know.

Best,

Marimar

CEO, Miranda ESG