Why Environmental, Social, and Governance is Here to Stay (2024)

Described by its critics as “woke capitalism,” Environmental, Social, and Governance, (ESG) is facing something of a backlash. But that overlooks the far-reaching benefits to employers and investors.

A survey by The Conference Board (TCB) found that almost half of all businesses have faced ESG backlash. 61% believe that backlash will remain the same or increase in the next couple of years. In this article, we explore that resistance, and highlight the benefits to employers. We also explain why ESG is here to stay, while acknowledging the language around it may need to evolve.

Overcoming resistance to ESG practices

Political resistance to ESG practices emerged during a failed vote in the House aimed at overriding President Biden’s first veto. The legislation opposed the consideration of ESG issues in retirement and investment decisions.

Opposition is not unexpected. A rocky 2023 was predicted for ESG back in February, highlighting dual threats of the “anti-woke” movement, and concern over the value of ESG investments.

Notably, Larry Fink, influential Chairman of investment company Blackrock, chose not to directly refer to ESG in his annual letter to investors. He later explained his omission is not indicative of his views but a sign he believes the term is loaded. Blackrock continues to discuss decarbonization, corporate governance, and social issues with investors. It hasn’t changed its stance on sustainable business practices.

Benefits of sustainable business practices in the workplace

ESG practices help to create a positive company culture and attract more talent to your organization. For instance:

• A survey by Society for Human Resources Management (SHRM) found that one in three US workers state their employer’s ESG strategy was a factor in their decision to apply.
• Sustainable business practices support pay equity, a critical component of the S in ESG. A commitment to pay equity makes a clear statement to potential investors about your DEI (Diversity, Equity, and Inclusion) initiatives. It also attracts more talent to your organization andmotivates employees to work harder.
• DEI and corporate profitability are also interlinked. Studies show 19% higher revenues and 25% greater profit and retention and attraction of team members for companies committed to DEI.
• An article in the Harvard Business Review found that investing in DEI helps employers to become more adaptable and improves their ability to change. That results in a stronger culture and leadership, coupled with more engaged employees.
• 96% of employeesexpect their employers to adopt a sustainability agenda.

Workforce wellness and innovation

Sustainable businesses practices also offer workplace benefits for workforce wellness and innovation as the following demonstrates:

• The focus on workforce wellness and innovation has reached the federal level. 2021’s Workforce Investment Disclosure Act states that “…80% of public companies that took concrete actions on health and well-being having seen larger improvements in financial performance.”
• Workforce wellness and innovation are interlinked. Bloomberg Law reports that employee mental wellness is directly related to creativity and innovation in the workplace. Comprehensive mental health and employee wellness benefits also boost productivity, performance, and retention. These findings support the Workforce Investment Disclosure Act which states that employers increasingly rely on workforce innovation and intellectual capital for competitiveness.

In the wake of the pandemic, Deloitte also highlighted workforce wellness as essential to ESG strategies and reporting.

Environmental, Social, and Governance in the EU

As it does in closing the gender pay gap with its Pay Transparency Directive, the EU leads the global field in ESG.

In January 2023, the European Union adopted the Corporate Sustainability Reporting Directive (CSRD). The Directive requires EU and non-EU companies operating in the EU to file annual sustainability reports with their financial statements. Reports must be prepared in accordance with European Sustainability Reporting Standards (ESRS).

On July 31, 2023 the first set of ESRS was adopted by the EU, covering the whole range of Environmental, Social, and Governance issues. The information provided enables investors to understand the sustainability impact of the companies in which they invest.

A strong commitment to ESG across the EU is echoed in the 2023 Sustainable Investment Survey from the Harvard Law School Forum on Corporate Governance. It shows that 63% of European investors probe their prospective GPs on their ESG approach. That compares to 48% in the US.

Environmental, Social, and Governance is here to stay

While the terminology relating to ESG may need to evolve, its longevity is evident in the following:

The number of S&P 500 companies including ESG metrics in compensation plans rose to 70% in 2022 –up from 57% in 2021. Measurements of carbon footprint and diversity and inclusion are showing the fastest growth.

TCB’s survey reveals that nearly two-thirds (63%) of companies that experience backlash are increasing their focus on the link between ESG and core business/shareholder value.

60% of investors said it was either “very important” or “extremely important” that a GP (General Partner) measures the social and/or environmental impact in their management of portfolio companies when deciding to commit to or recommend a fund. That’s according to the 2023 Sustainable Investment Survey.

Consumers think ESG matters too. 83% believe employers should be actively working on ESG best practices.

At its core, ESG focuses on nurturing responsible and sustainable business practices that contribute to the bottom line.

Strategies for implementing effective ESG practices

Companies committed to sustainable business practices and ESG can benefit from the following steps:

• Create a culture of pay equity: Pay equity is the key to achieving the social component. Equal pay is highlighted in theEU’s CSRD,which states that standards must be developed to ensure:

“equal treatment and opportunities for all, including gender equality and equal pay for work of equal value, training and skills development,the employment and inclusion of people with disabilities, measures against violence and harassment in the workplace,and diversity.”

• Stay on top of current legislation, ESG developments in Europe affect international employers too. An additional 10,000 non-EU companies are affected by the most recent ESG developments. Of those companies, 31percent are American (approximately 3,000), 13 percent are Canadian, and 11 percent are British.
• Develop policies for responding to the backlash. TCB’s paper on dealing with ESG backlash offers numerous strategies. These include aligning sustainability goals with business strategy, and revisiting terminology. TCB suggests that “concepts such as clean air, clean water, equal economic opportunity, and quality of life may be even more effective than terms such as sustainability.” At Trusaic, we will be adopting these and similar terms including “sustainability initiatives” or “responsible business practices” to refer to ESG in the future. Our goal is to ensure a message that resonates with a wider audience and aligns with our overall message of inclusion.

Whatever term is used to describe Environmental, Social, and Governance issues, it does not alter the fact that the enduring principles of sustainable business practice are here to stay.

Trusaic’s PayParity can help organizations ensure compliance with confidence and accuracy. PayParity allows employers to continuously monitor pay equity, certifying that their workforce is equitable, and demonstrating to stakeholders that fair pay is a top priority.

ESG reporting is on the rise. Organizations must ensure they're adhering to the requirements. Our Practical Guide to CSR and ESG Reporting provides everything your organization needs to know to demonstrate your commitment to social responsibility.