ESG (Environmental, Social and Governance) is under intense scrutiny. The ‘woke capitalism’ moniker that is being applied to ESG by some on the right of the US Republican Party (and others) is part of a wider reset facing ESG.

During the extraordinary economic turmoil that we saw in 2022, from the war in Ukraine to the global energy crisis, inflation spike and cost of living issues, ESG has been regarded by some as failing to keep step with a changing world.

The argument put forward by the anti-ESG side is that it fails to deliver what is promised. Because there is no global standard for what ESG means, much is left open to interpretation. That leaves space for over promising and under delivery (greenwash).

The soaring share values of fossil fuel companies during the past year and the inability of ESG-focused funds to profit from investing in them has been part of the reason that many ESG funds performed weakly in 2022. That too has fuelled the flames of the anti-ESG movement.

Critics argue that doing good through the agency of money isn’t worth much if it loses its investors cash due to the limits that ESG applies to which assets can be invested in. There are some with even more ideological perspectives who accuse ESG investors of failing in their fiduciary duty to investors by preventing investment into fossil fuels. Some US states (most recently Kentucky) have banned State pension schemes from investing into funds controlled by asset managers that follow ESG doctrines, because they feel ESG limits the ability of fund managers to select the highest performing assets.

Equally, the argument put forward by the likes of Stuart Kirk (the former Global Head of Responsible Investing at HSBC) and Tariq Fancy (former Chief Investment Officer for Sustainable Investing at Blackrock) that ESG is not the same as delivering change and impact (I paraphrase) has also stoked the debate, mainly because it’s true.

So, does that mean that ESG is a busted flush? A corporate trend that has failed to deliver?

I would argue not, and I would also argue that the Communications industry has a key role to play in putting ESG into a context that focuses corporate minds on the opportunity and imperative of doing good through business. Not because it is ‘woke’ but because it is what society as a whole expects.

Leading positive change

ESG is far more than an investment metric or a way of assessing emerging environmental and social risks. It is a movement for change that recognises that business cannot exist solely to make profit. Business also has a responsibility to lead positive change in society, in decarbonising the world and protecting our natural environment. It has the ability to deliver real impact through creating good jobs, paying taxes, facilitating social mobility and creating a more diverse and representative reflection of society in corporate hierarchies.

These things are good for the world but they’re also good for business. Better businesses that lead based on strong values and a forward-looking strategy are magnetic. They attract the best talent, they score highly in procurement and compliance processes and they are able to de-risk their operations from big macro issues that will impact us all.

Climate change is coming. Avoiding it requires us, under the UN Paris Agreement, to limit global warming to 1.5C of pre-industrial levels. We’re currently on course for around 2.8C global warming. That means huge climate change, including sea level rises and flooding, extreme weather, displacement of people, changes in the natural world that will impact raw materials and prices and force change in energy use, generation and consumption patterns. In short, it means unprecedented change, disruption and risk. All things that business and investors hate.

Working together to avoid that isn’t ‘woke’ it’s an existential imperative. It’s also about far more than ESG, its about recognising that business has power, money and the ability to make different choices and by doing so can de-risk its operations, help secure a better future and win kudos in a world that increasingly sees people choosing to work for, buy from and invest into companies that reflect their own values.

People expect more

SEC Newgate’s annual ESG Monitor research, which polls more than 12,000 people in 12 countries on their views on ESG and corporate behaviour, shows that the public expect more of business and want business to lead positive change.

More than three-quarters (77%) of those polled said companies have a responsibility to behave like a good citizen; 60% believe companies should be penalised for ESG inaction and more than two in five do not trust what companies claim about their ESG performance.

These are figures that should worry us all. Perhaps the most surprising finding is that only 15% of those we polled globally said they had heard of ESG and had a good understanding of it. Yet when you explain it to people they care deeply about the issues.

And this is the key. In a world where corporates are expected to step-up on ESG issues by the public, and in which the climate science tells us we have to act faster and do far more if we are to avoid catastrophic climate change, corporates need to lead from the front and do the right thing.

Brand and reputation are based on values and delivering those values, not purely on profit.

In the current economic turmoil, it may seem expedient to roll back on some ESG commitments, to listen to siren voices saying you should invest in oil, dial back your investment in decarbonisation, lay off staff to protect margins, but corporate brand and reputation will be judged on a longer term metric.

Early adopters of the purpose and profit model

When you look at the organisations globally which have been early adopters of the purpose and profit business model, have embraced the circular economy and corporate citizenship, they are among the most respected brands globally. Companies like Unilever, Patagonia, the B Corp companies, and many others are demonstrating that focusing on the positive impact that business can deliver also brings commercial, reputational and investor benefits.

It also requires a bold approach to communications. Asking the world around you, investors, customers, staff, regulators, activists, media, politicians and the public, to trust business as it transitions from a pure capitalist model to one that has a shared objective for positive social and environmental impact, requires all these stakeholders to support the business and its leadership team on that journey.

That’s a big ask and its one that needs a clear strategy, targets, transparent reporting of both success and failures and proof of positive change.

It’s hard work and it exposes business to scrutiny that many will not have experienced before. In a climate of criticism for ESG it is understandable that some may question whether it is worth the effort.

I would urge business to stay the course. We will get through the current turmoil and when we get to the other side all the stakeholders surrounding business will ask again what the corporate world is doing to save the planet, drive fairness in society, to act to the highest standards. Having a clear plan and strategy that answers those questions and a group of stakeholders who are engaged and willing to endorse what the company is doing will be critical in promoting and protecting corporate brands into the future.

Those that succeed will be trusted, revered and successful. Those that do not will be relentlessly pursued by activists, regulators and politicians and will find the public voting with their feet.