It’s no secret by now that corporate environmental, social and governance (ESG) efforts have become highly politicized. The latest example is a letter sent by the U.S. House of Representatives Judiciary Committee on July 30 to some 130 institutional investors, asking them to explain the rationale for their ESG goals. The letter, which suggests that participation in certain climate initiatives may violate U.S. antitrust laws, highlights the challenge facing businesses today of balancing sustainability goals and stakeholder demands with political rhetoric.
Today, the news is full of ESG initiatives failing to gain significant support in proxy votes, a decline in new ESG fund launches, and other anecdotal examples that suggest the world may be losing interest in sustainability.
it’s not.
Despite the anti-ESG rhetoric, sustainability is more important than ever for businesses.
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Viewing ESG as a risk indicator
Indeed, when we look at the data, we see that sustainability is more important than ever for companies. But unlike politicized narratives that appeal to emotive rhetoric, the business case for sustainability is increasingly focused on impacts, risks and opportunities. After all, companies exist to create value. Anything that could disrupt that function is a risk, and those risks must be managed.
Consider the results of Deloitte’s recent 2024 ESG M&A Trends Study as evidence: over 70% of companies surveyed have abandoned acquisitions due to ESG concerns. Moreover, companies are willing to pay a premium for acquisition targets with strong ESG track records.
The facts are clear: from an investor and stakeholder perspective, sustainability-related risks are still risks and need to be treated as such.
Even companies that are not actively committed to sustainability or have not declared themselves environmental activists are considering ESG issues as a risk indicator when evaluating potential acquisition targets. If they don’t like a potential target, they are better off walking away than getting caught up in the very real regulatory and reputational risks that can come with partnering with a company that doesn’t take sustainability seriously.
Regulatory Reality
This is an important point. The political dimension of ESG, where terms like “woke capitalism” and “climate cartel” tend to pop up, waxes and wanes with changing news cycles. However, real business risks that could impair a company’s ability to operate in certain parts of the world or source goods from certain suppliers are already established. The European Union’s (EU) Corporate Sustainability Reporting Directive and Corporate Sustainability Due Diligence Directive both introduce stringent sustainability reporting requirements for certain companies operating in Europe. Globally, the Sustainability Reporting Standards developed by the International Sustainability Standards Board (ISSB) of the International Financial Reporting Standards Foundation (IFRS) introduce climate disclosure requirements for companies worldwide.
IFRS and the G20 itself, which created these international standards based on the G20 Task Force on Climate-related Financial Disclosures (TCFD) structure, are by no means bastions of “woke” policy. These reporting standards are hardcore financial reporting methodologies developed and adopted following the same protocols used to establish the accounting standards used by the world’s largest corporations. They come with specific guidelines that companies can never ignore.
Non-compliance with these regulatory reporting requirements can result in heavy penalties. In France, for example, penalties for violating the CSRD transitional law can be up to €75,000, plus a five-year prison sentence for directors who withhold material information from third-party assurance providers or obstruct the work of auditors. This is a business risk that should keep executives up at night.
Data will set you free
As we’ve said before, businesses are currently in the midst of implementing what football and rugby aficionados affectionately refer to as “the hard yards” when it comes to sustainability-related transformation. Faced with a very real set of regulatory demands that demand rigorous standards for sustainability reporting and target setting, businesses must also come to terms with the fact that every step they take will be scrutinized by regulators, legislators and consumers.
This is where data becomes essential. Besides bold declarations, lofty ESG goals and mission statements, there’s only one thing that will silence critics, satisfy regulators and resonate with consumers and investors: evidence that efforts to improve sustainability are delivering objectively better business outcomes. The companies that can clearly demonstrate the sustainability investments they are making and the positive impact they are making will ultimately be the ones that rise above ESG politics and define the future of business.
It is worth noting that, even in the case of the aforementioned letter to US institutional investors, members of Congress are seeking solid evidence to support companies’ ESG objectives. When ESG is tied to solid business and financial risks and objectives, it is much harder to argue against.
The key to achieving this is that ESG and sustainability related issues must be treated as potential business risks, measured, managed and clearly communicated to all stakeholders. The names may change depending on the spokesperson’s agenda, but the risks remain the same.
