In Defence of ESG – and Support of Better Work

We’ve all heard the recent concerns from executives, investors, politicians and others about the term “ESG” – referring to an organization’s environmental, social and governance priorities. Some have noted that companies are unfairly penalized or praised when using an ESG lens. Others claim that companies labelled as ESG-focused haven’t done much more than pay raters and tick boxes. And a significant number of prominent government representatives (mainly in the U.S.) have even instigated blocking or restricting ESG-related investment. Early champions, including BlackRock’s Larry Fink, no longer use ESG to discuss these issues because it has become such a “weaponized” term – though many analysts and investors still focus on extra-financial risks and impacts.

We get the recent backlash.

ESG has introduced business and reputation opportunities that have been pursued with varying intent. As a result, some companies adopted ESG as a way to begin to understand and potentially improve their social and environmental impact. Some had also used ESG to refresh their identities – or to repackage investment products (at a premium) – to tell their people, customers, Bay Street and Wall Street that their focus extends beyond shareholder capitalism.

However, as emphasized in the Business Roundtable’s revised “Statement on the Purpose of a Corporation,” this shift toward stakeholder capitalism merely refers to a widely acknowledged fiduciary duty supported by disclosure regulations and guidance relating to topics ranging from climate change and environmental impacts to board diversity and human rights. While these obligations have been firmly in place for some time, analysts’ and rating agencies’ requests have dug deeper into ESG governance, risk, strategy and performance to improve how they evaluate their investments.

These recent developments have prompted companies to address and disclose on a wider range of risks extending to their value chain. Some companies have recognized the benefits of adopting a broader stakeholder perspective and have taken thoughtful and ambitious strides to improve their management, measurement and performance. These companies are genuinely committed to making a positive impact on their operations, people, partners, communities and the planet. Their efforts should be celebrated, and they should be encouraged to continue their sustainability journey.

On the other hand, reporting on these areas as “ESG” has led some companies to state that they’re “leaders” based only on big-picture commitments, claims and 2050 targets that barely address their impacts. Those who don’t have a detailed roadmap to show their path toward net zero, independent verification of their data and claims, or a credible account of their positive and negative impacts will continue to face considerable skepticism, backlash and lawsuits based on greenwashing and/or social washing claims. As we’ve witnessed with the widespread adoption of corporate and product eco-labels, we’ve seen unsubstantiated or exaggerated claims from dishonest actors who chose to capitalize on the present despite the longer-term risks that will inevitably threaten their reputation – and perhaps their very existence.

So, if not the term ESG, what do we recommend our clients use?

More and more, if a company is aiming to engage people, inspire holistic and positive outcomes, and sidestep what has become a highly politicized three-letter initialism, we advocate for the use of “sustainability.” This term not only avoids contention but also implies a forward-looking, ambitious and inclusive approach. For clients in the early stages of their sustainability journey, we recommend embracing sustainability’s broader principles (e.g., UN Brundtland Commission, Sustainable Development Goals) to establish a social purpose and vision that can help them genuinely connect with stakeholders and contribute to both a better company and a better world.

When it comes to being purpose- and impact-driven, it’s essential not to get hung up on terminology. What truly matters is maintaining focus. This involves understanding and mitigating risks, pursuing high-impact opportunities and applying a long-term lens. It’s about doing great work. What you measure and value and the (positive) impact you commit to delivering for the environment and society are critical to being a genuine leader moving toward sustainability.

We applaud those who are truly strengthening their organization’s “house” and improving transparency to reflect evolving insights, actions and outcomes. Keep it up. Tell the truth. Be humble and brave. Believe in yourself and engage with others who can make you – and our world – better.

We have a long road ahead, and we hope you’re on board for the journey.