ESG Backlash Is Real and Growing. What to Know.

The backlash against ESG—the use of environmental, social & governance factors in business and investing—is real and likely to increase. As ESG has recently become a political flashpoint, understanding its impact should be a priority for corporate leaders, because investors are likely to judge them by their responses. 

In a recent survey by The Conference Board of more than 100 large US companies, nearly half said they have already experienced ESG backlash, and 61 percent expect it to persist or intensify in the next two years. 

Companies also expect it to spread: While the financial services industry, and large asset managers in particular, have borne the brunt of this pushback, a majority of companies we surveyed are concerned they will face opposition from federal and state officials and candidates. Moreover, a growing number of firms also expect pushback from employees, consumers, business partners, the media, and investors. 

For their part, companies should view ESG backlash as an opportunity to clarify their strategy and communications. Investors should look for companies to take five key steps to drive long-term value in this environment.

Focus on strategy

A majority of companies (63 percent) say they are increasing their focus on the business case for ESG and how it connects with shareholder value. Investors should expect companies to present a coherent, cohesive narrative of their company’s strategy that includes ESG—in other words, to have a business strategy that is sustainable, not just a separate sustainability strategy.

A potential red flag is when the company has only conducted a “materiality analysis” to identify key ESG issues. That is a useful starting point, but investors should look at whether the company has taken a more strategic approach in assessing where the company stands today on key ESG issues, where it wants to go, and how it will get there. The strategy should also describe the timetable and necessary resources.

Refine language

Investors may well see companies change the way they talk about ESG. Nearly half the companies surveyed are now talking less about ESG and more about “sustainability,” “corporate responsibility,” or “responsible growth.” That shift can make sense, especially as ESG is a term that was developed with investors in mind and may not resonate as well with other key audiences for companies, including customers, employees, and the broader public.

At the same time, 27 percent of companies are reducing their level of external communication about ESG. While companies should avoid acting as roving commissions weighing in on social and environmental issues that have little to do with their business, investors should be concerned if a company entirely retreats from a discussion of ESG topics. Companies should not allow anti-ESG groups to control the narrative. Abruptly abandoning the field can cause stakeholders to doubt whether the company was serious about the underlying issues to begin with.

Engage policymakers 

Given the risk of officials codifying anti-ESG sentiment in legislation and regulation, companies should engage with influential policy makers at the federal, state, and local levels. Local government leaders can be important allies who can speak up about a company’s positive impact on their communities.

Only 23 percent of companies have directly engaged with policymakers who oppose their ESG positions, and that may be a missed opportunity to engage those who are “persuadable.” Importantly, much of this engagement should happen behind the scenes, in private conversations with policy makers, through trade associations, and in concert with others such as small businesses.

Give investors a helping hand

Institutional investors are being hit by all sides. They are targets of anti-ESG campaigns to disinvest funds; their upstream clients are seeking more of a say in voting decisions; and they are struggling to stay afloat in a rising sea of shareholder proposals. The number of shareholder proposals voted on at annual meetings rose by almost 10 percent from 636 in the first half of 2022 to 693 this year.

Companies should listen to shareholders and learn what information they need to make informed, company-specific voting decisions. This may include more detailed information than companies have provided in the past about their engagement with the shareholder proponent and the costs and benefits of implementing the proposal. 

Maintain perspective

Above all, investors should expect companies to keep ESG backlash in perspective and to respond constructively. There are powerful business reasons why companies focused on ESG issues in the first place—and those remain. Indeed, with upcoming SEC regulations on climate and the EU’s Corporate Sustainability Reporting Directive that will directly affect an estimated 3,000 US firms, companies cannot afford to put ESG to the side.  

At the same time, companies should listen to ESG critics with an open mind. Much of the pushback comes from healthy skepticism or legitimate disagreement about the appropriate role of corporations, not just from political opportunism. Companies should not react emotionally to backlash but take this as an opportunity to have a candid, fact-based discussion about ESG at the board and senior management levels.

By focusing on business strategy, refining terminology, engaging policy makers, assisting investors, and maintaining perspective, companies can turn ESG backlash into advantage and drive long-term value.

This article was originally published on the Barron’s website.