The effectiveness of Environmental, Social, and Governance (ESG) initiatives in achieving intended goals and addressing critical global challenges is a topic of intense debate. While ESG principles have reshaped corporate strategies and investment priorities, are they really delivering the tangible changes we need, or are we just scratching the surface and creating optics?
A quick trip down memory lane
The roots of ESG lie in the ethical investing movement of the 1960s and 1970s, which saw investors exclude industries like tobacco and weapons from their portfolios. By the 80s, this evolved into Corporate Social Responsibility (CSR), encouraging companies to take responsibility for their environmental and social impacts.
Fast forward to the 90s, and global frameworks like the Brundtland Report and the Kyoto Protocol began to emphasise sustainability, intertwining economic growth with environmental stewardship and social equity. Then in 2004, the term “ESG” emerged through the Who Cares Wins report, which tied environmental, social, and governance factors to financial performance.
After 2010 ESG went mainstream. Big initiatives like the Paris Agreement, made sustainability a global priority, and investors started using ESG as a way to manage risks and create long-term value. Frameworks such as the Principles for Responsible Investment (PRI) gained prominence, reinforcing ESG’s role in shaping corporate and investment strategies.
So, how is ESG making a positive impact today?
It’s clear that ESG has pushed companies to prioritise sustainability and good governance. Many now leverage ESG as a growth driver, using sustainability initiatives to unlock innovation and access new markets.
Take Nestle, for example – they’ve embraced renewable energy. Unilever has seen notable success with its sustainable product lines. ESG practices also contribute to operational efficiency, with studies showing that companies focusing on sustainability reduce costs and improve profitability by minimising waste and lowering energy consumption.
We’re also seeing tangible results from organisations with robust ESG strategies, such as reduced carbon emissions, enhanced labour conditions, and stronger governance frameworks. These successes not only benefit the environment and society but also bolster stakeholder trust and regulatory compliance.
In the investment arena, ESG metrics have become integral to decision-making. Major asset managers, including BlackRock, now incorporate ESG considerations to identify opportunities and mitigate risks, encouraging companies to align their practices with sustainability goals.
Governments and regulators have further cemented ESG’s importance by embedding sustainability principles into legislation, promoting accountability and long-term resilience.
But let’s not sugar-coat it – there are challenges
Despite its progress, ESG isn’t without its hurdles. Greenwashing—where companies overstate their sustainability efforts— is a real issue, eroding stakeholder trust and raises doubts about corporate commitments.
Then there’s the lack of standardised ESG metrics and reporting frameworks. Without universal standards, comparing companies and evaluating the true impact of their ESG initiatives remains a challenge, limiting transparency and accountability.
Critics also highlight the tension between financial and social objectives. Some argue that ESG is too often seen as a risk management tool, prioritising financial performance over meaningful social or environmental impact.
The material impact of ESG on global challenges remains under scrutiny. And while progress has been made, big challenges like climate change, social inequality, and biodiversity loss continue to escalate, raising questions about ESG’s effectiveness in driving large-scale change.
What’s trending in ESG?
It seems investor interest in ESG has cooled a bit. The Association of Investment Companies’ 2024 ESG Tracker revealed doubts about the financial returns of ESG-focused strategies. The conversation around ESG has become quite polarised, with some dismissing it as “virtue signalling” or “woke.”
That said, governance is now gaining prominence alongside environmental concerns, reflecting a shift in focus within the ESG framework. Meanwhile, investors in emerging markets face unique challenges, particularly in accessing reliable ESG data, which is critical for informed decision-making.
Despite these hurdles, the core principles of ESG—transparency, responsibility, and sustainability—remain essential, serving as a reminder of the private sector’s role in driving meaningful change.
Zooming in on South Africa and Kenya
The 2024 Sanlam ESG Barometer, which surveyed listed companies across South Africa and Kenya, revealed that sustainability correlates with profitability, resilience, and better brand value. South African firms, in particular, show less concern about the global backlash against ESG, focusing instead on the opportunities it presents.
However, the complexity of ESG, compounded by political resistance in regions like the United States, underscores the need for businesses to navigate these challenges carefully. Encouragingly, the benefits of robust sustainability strategies are increasingly evident, reinforcing the importance of ESG in building resilient and forward-thinking organisations.
So, what’s next for ESG?
ESG has made great strides in raising awareness and encouraging better business practices, but there’s still work to do. Greenwashing, inconsistent metrics, and an overemphasis on profits are holding it back. Do you think ESG is having material impact?
Sources:
FinTech Magazine (2024). AIC: ESG Investing Trends Diverge in 2024.
Harvard Business Review (2022). An Inconvenient Truth About ESG Investingby Sanjai Bhagat.
World Economic Forum. (2023). Measuring Stakeholder Capitalism: Towards Common Metrics and Consistent Reporting of Sustainable Value Creation.
ESG Today (2023). Over 80% of Companies to Increase Budgets for Environmental Sustainability Goals Over Next Year: Honeywell Survey.
McKinsey (2023). ESG Momentum: Seven Reported Traits That Set Organisations Apart
McKinsey (2019). Five Ways That ESG Creates Value.
