The Ghosts of ESG Past, Present, and Future

For some, 2024 marked the year of death for ESG. Once heralded as a transformative force in corporate strategy and investment, ESG now faces significant challenges that reflect a polarised political landscape. With this, we can look at the ghost of ESG past, present and future.

Past: a buzzword or a guiding philosophy?

Although ESG was coined in 2004, and can be traced back to the 1960s, its popularity skyrocketed between 2018 and 2022. ESG emerged as a symbol of the future in corporate and investment landscapes. The European Union’s Green Deal, announced in December 2019, aimed to make Europe the first climate-neutral continent by 2050, implementing ambitious measures to reduce greenhouse gas emissions and promote sustainable growth across various sectors. Concurrently, the UK’s Green Finance Strategy outlined a roadmap for establishing the UK as a leader in green finance, focusing on enhancing climate risk disclosures and developing sustainable financial products. ESG was seen as a way for corporate to demonstrate their positive contributions and for investors to compare ESG risk management.

This period saw ESG gain unprecedented visibility, with inflows into sustainable funds surging. The COVID-19 pandemic further amplified the excitement surrounding ESG by highlighting the interconnectedness of health and environmental issues. Many corporations began setting ambitious Net Zero targets as part of their recovery strategies, viewing sustainability as integral to their future success. This momentum culminated in COP26, held in November 2021, where nations adopted the Glasgow Climate Pact, reinforcing global commitments to climate action.

Overall, the period marked a transformative shift in how businesses and governments approached sustainability, with ESG becoming a dynamic force driving corporate strategy and investment decisions in an increasingly uncertain world.

Present: You either die a hero or live long enough to become the Villain

In the present day, the ESG landscape is marked by significant challenges and uncertainties. The anti-ESG movement has gained momentum, driven by economic and nationalist arguments. Some politicians and business leaders question the necessity and impact of ESG regulations, framing them as part of a broader “woke agenda” that threatens economic prosperity and national sovereignty.

The Draghi report, published in September 2024, suggests that the current regulatory burden, including the CSRD, may be hindering European businesses. The report advocates for simplification and deregulation in certain sectors, reflecting broader tensions within the EU about the balance between sustainability goals and economic growth. This goes hand-in-hand with many countries delaying the transposition of CSRD into national law, and now Germany is pushing the European Commission to scale back on reporting rules.

However, the CSRD is reshaping how corporations approach sustainability by requiring boards and CFOs to prioritise ESG considerations in their strategic planning. With the first year of CSRD reporting underway, companies must disclose comprehensive sustainability metrics, providing investors with comparable data across a wider range of businesses. California’s Climate Disclosure Law, set to take effect in 2026, will require companies to report on climate emissions and risks. This law has already survived legal challenges and inspired similar bills in four other states.

The rise of anti-ESG shareholder proposals represents a significant shift in the corporate governance landscape. In 2024, anti-ESG proposals surged, reflecting a growing scepticism of ESG practices and regulatory frameworks despite the implementation of the Sustainable Finance Disclosure Regulation (SFDR) and the Sustainable Disclosure Requirements. Notably, the emergence of funds like the God Bless America ETF (YALL), which targets companies that oppose progressive social policies, underscores this trend. These developments indicate a backlash against perceived “woke” ideologies within corporate America, as investors increasingly seek to align their portfolios with conservative values.

Additionally, major asset managers are pulling out of initiatives like the Net Zero Asset Managers (NZAM) alliance, further complicating the ESG narrative. Furthermore, some companies are reconsidering their previously set Net Zero targets which were often based on unrealistic goals.  As anti-ESG proposals gain traction, they are altering the dynamics of shareholder engagement and prompting a re-evaluation of sustainability commitments in corporate strategies.

Future: Till death do us part?

Looking ahead to 2025, the future of ESG will be significantly influenced by the political landscape, particularly with the re-election of Donald Trump. His return to office is likely to lead to a renewed withdrawal from the Paris Agreement. This shift may further entrench anti-ESG sentiments, as regulatory rollbacks are expected to prioritise short-term economic gains over long-term sustainability goals. The rollback of the SEC’s climate disclosure rule and other ESG-related regulations would likely exacerbate tensions surrounding corporate governance.

In this evolving context, Joe Biden’s Nationally Determined Contributions (NDC) under the Paris Agreement will continue to set ambitious climate targets for the U.S., potentially conflicting with a Trump-led administration’s policies. Meanwhile, the UK is advancing its Sustainability Disclosure Standards and implementing its Industrial Strategy with a focus on on Decarbonisation. The European Commission is also working on ESG ratings regulations that could standardise how companies are evaluated on their sustainability efforts. These developments, alongside the proposed omnibus regulation of CSRD, CSDDD and the EU taxonomy, will create a fragmented ESG disclosure landscape as corporates have already made significant investments in disclosure.

As companies navigate this complex environment, they will face competing pressures from pro-ESG coalitions and anti-ESG advocates while ensuring their sustainability strategies remain aligned with stakeholder expectations. Ultimately, how organisations respond to these challenges will determine their ability to thrive in a rapidly evolving ESG landscape marked by both opportunity and uncertainty.

Contact:

Hannah Stewart, Consultant

H/Advisors Maitland

hannah.stewart@h-advisors.global