Bad business? The politicisation of ESG

The culture wars raging around environmental, social and governance (ESG) issues, particularly in the US, show little sign of abating. In 2023, anti-ESG regulatory measures in the US outpaced pro-ESG ones, and with US elections looming, the controversy is only likely to intensify in the short term. In this complex landscape, businesses must equip themselves with the tools and partners to navigate this uncertainty.


Why is ESG controversial?

With ESG issues increasingly scrutinised – and criticised – they are no longer on the fringes of the business world. Various stakeholder groups, including investors, customers and employees, have their own expectations. Most employees encounter these topics in their daily work, while externally the evolution of voluntary guidelines into disclosure regulations is forcing corporates to act.

These shifts have several implications, including a lack of consensus over reporting standards, confusion over what constitutes ‘materiality’ and widespread accusations of corporate greenwashing. As recently as January 2024, investment giant BlackRock flagged ESG scrutiny as a risk factor to earnings in its Q4 2023 results.

Many conservative policymakers believe that ESG considerations override a business’ greatest responsibility – to maximise revenue and increase returns for shareholders. To them, ESG means ‘bad business’.


Not a universal view

However, this view is not shared globally, and a stakeholder-driven business culture can demonstrate that ESG is not at odds with revenue maximisation.

At Flag, we always advise that clients demonstrate the business case for their ESG work, such as better employee retention and enhanced growth opportunities. Whether they emphasise the benefits to people and planet, or its relation to value creation, we help our clients demonstrate that ESG considerations are financially material over the short and long term. By showing that ESG is in fact ‘good business’, corporates can continue to invest in their sustainability work and stand up to their critics.


Good business

In the face of staunch and vocal opposition, companies and investors continue to battle climate change, increase diversity and protect workers’ interests.

At Flag, we believe the sustainability of business transcends political ideologies and debates. Much as Michael Porter and Mark Kramer suggested in 2011, businesses can (and perhaps, should) create both economic and societal value by addressing ESG issues through their core business activities.

ESG factors were initially designed to guide corporates towards more sustainable, socially responsible and resilient business practices. By embedding such considerations in their operations, companies can mitigate risks, seize new opportunities and contribute positively to society and the environment.

Few of the clients we work with foresee changing their strategies or reporting based on the current debate, and nor should they. To thrive, corporates should prioritise a sincere, holistic commitment to sustainability over basic compliance, making them more resilient whatever the political landscape.

Similarly, we believe that there‘s no point trying to avoid ESG terms or come up with new ones to placate the detractors. Instead, companies must endeavour to clearly articulate their ESG credentials to their stakeholders and shareholders, linking it to performance and financials wherever possible.

While the so-called ‘politicisation’ of ESG may introduce complexities in practice, it should not deter companies from prioritising sustainability for the sake of their own resilience, relevance and positive impact. Simply put, it’s good business.


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