Companies face ESG critics from both sides, survey

“Companies must be prepared for multiple risks, including stakeholders who think they are going too far on ESG and, conversely, those who think they are not doing enough,” says Teneo vice chair and head of governance and sustainability Martha Carter. 

The polarized political environment has done little to help the reputation of ESG. Even as voters from different parties can’t agree on whether ESG initiatives are appropriate considerations for businesses to factor into their decision-making, they can agree that they have objections. 

“Previously, companies were only getting pressure from the left to be more ESG-focused, but today, global companies—particularly those with household name brands—are also vulnerable to political pressure from the right to be less ESG-focused,” Carter says. 

The upcoming presidential election has thrust ESG back into the spotlight, particularly in the ongoing Republican primary, which has seen the topic become a talking point among the party’s candidates. Entrepreneur Vivek Ramaswamy, who authored several books slamming ESG as a way for companies to push an ideological agenda, without delivering returns for shareholders, has been one of the most vocal critics, and his critique has gained currency on the right. In May of last year, Florida Gov. Ron DeSantis signed a bill prohibiting state officials from investing public money, such as pensions, in ESG initiatives. The bill also barred state agencies from factoring any such criteria into whether or not to award government contracts to businesses that bid for them. A few weeks before Florida signed its state law into effect, President Joe Biden vetoed a national version of a similar bill. 

A ‘boogeyman’ term for CEOs

To avoid much of the furor the term ESG can cause, some executives have opted to simply change the name they use. “The trouble with the term is it’s become a boogeyman,” Walmart’s chief sustainability officer Kathleen McLaughlin said at Fortune’s Impact Initiative conference in September. “It means a lot of different things to different people.” 

For many of those companies, the change is mainly cosmetic. CEOs “think it’s rather myopic, to think you can just take away these three letters that have become toxic and demonized, and just rename it,” a source with knowledge of Teneo’s research says. “It’s the same program. Sadly, that is the way the political situation has become.”  

For professor Florian Berg, an MIT professor who researches ESG, the controversies around the topic stem from a lack of clarity about what its goals are. Because the letters are loosely defined, shareholders, the public, and even employees aren’t sure if they refer to a company’s corporate social responsibility agenda or a long-term profit strategy. “This problem of the definition of ESG has been around for forever, since its inception,” Berg tells Fortune. 

When people are unclear about what to expect from a business, it can leave them feeling misled. “The problem with the backlash is that if we’re not really honest about what the term does, of course, then there will be criticism,” Berg says. “And that criticism might be justified.” 

Companies don’t always help engender that trust, either, according to Berg. “The problem is that companies and also investors are often not really honest about their intentions,” Berg says. “They might actually sell something that’s purely a profit-driven decision and then write it in a report as they’re doing a lot for society even though they’re just engaging in profit maximization.”

To mitigate any possible backlashes—which tend to be media campaigns, often driven by social media—companies shouldn’t just look forward to their stated goals but also backwards at their past statements and actions. “The best approach is to stay close to what is important to your key stakeholders—including investors and employees—and ensure public statements and actions align with your business strategy and, of course, to any previously communicated commitments,” Carter says.