ESG Leadership Trends, from ‘Woke Capitalism’ to ‘Quiet Sustainability’

This is no time to get distracted, argues Fabrizio Ferraro — sustainable impact will bring the lasting change we need…

As world leaders and business titans gathered at Davos this year for the annual World Economic Forum, ESG was at the top of the agenda — albeit framed within the theme of “Rebuilding Trust”.

The title is a nod to a challenging global landscape that includes a growing backlash to social and sustainable indicators across the financial sphere. Even as WEF members made the case for a “green, digital and inclusive economy”, Republicans in New Hampshire were proposing a ban on using ESG criteria to attract state investment. Critics in Europe, meanwhile, have cast doubt on the viability of fair regulatory ESG metrics. Blackrock, in a departure from Larry Fink’s usual championing of ESG, intends to emphasise “financial resilience” in its talks with companies. Barclays has announced a Sustainable Banking Group, combining teams from the Sustainable Capital Markets and ESG divisions.

From political resistance to emerging EU regulation, the debate around the deployment of ESG responsibilities remains febrile. As the business world continues to face the fallout, four trends are likely to influence ESG leadership.

New EU Disclosure Laws

With the EU’s Corporate Sustainability Reporting Directive coming into play in 2025, a broader range of corporates and SMEs will have transparency thrust upon them. This should narrow the gap between sustainability leaders and slackers.

It will also provide structure for norms on sustainability reporting to reign-in greenwashing. The introduction of the EU Sustainable Finance Disclosure Regulation in 2021 has sparked a decarbonisation of investment portfolios. EU funds claim to make investment decisions based on sustainability criteria.

Quiet ESG

This is a response to politicisation. From US Republicans pulling $1bn from BlackRock over ESG investing concerns to the legal feud between Florida Governor Ron DeSantis and Disney, multinational corporations are finding themselves in the crossfire of a Right-wing backlash against so-called “woke” capitalism. This is likely to continue until the US presidential elections.

But this distracting wave of anti-ESG sentiment won’t move the needle at a time of such seismic change. Climate change continues to be the most common reason for portfolio exclusions. Despite stellar profits due to the Russian invasion of Ukraine, fossil fuels are increasingly being shunned.

Nonetheless, anti-ESG noise has prompted a more discreet approach from those asset managers inclined to use ESG as a ruse to market funds.

Decarbonisation

Corporations will be stepping-up their game up here. Major players are re-organising their core business around decarbonisation, and the need for a positive societal impact.

Schneider Electric has undergone such a transformation. It began life in 1836 as an armaments company — and has been reborn as a world-leader in sustainability and efficiency management. Finland-based Neste has moved from oil giant status to the world’s largest producer of renewable aviation fuels. Even Amazon, with its contentious track record on labour issues, is ahead of schedule on its plans to operate with 100 percent renewable energy by 2025.

UN Blueprint

ESG champions will increasingly align with the UN’s 17 Sustainable Development Goals (SDGs). Danish biotech Novozymes was one of the first to do so, amid increased demand for sustainable bio-solutions. Madrid-based Acciona Energia is leading a call to repower Europe’s ageing wind farms. It, too, is on the SDG path, declaring that “social progress, environmental balance and economic growth go hand-in-hand”.

It’s a policy that allows companies to resist short-term temptations. The SDGs provide them with a North Star in troubled times.

As the Davos elite are no doubt aware, there are no quick fixes in the realm of ESG. Against the backdrop of a competitive and divided market, personal interests are naturally protected — regardless of the greater good. But the WEF highlighted the need for open, transparent conversations as a path away from crisis-driven dynamics.

With the fight to keep global warming below the 1.5°C mark reaching a critical stage, businesses and investors must double-down on ESG commitments. This is no time to get distracted. Let’s co-operate and use sustainable impact as a lever for lasting, positive change.

• Professor Fabrizio Ferraro is head of the Strategic Management Department at IESE Business School, and academic director of IESE’s Institute for Sustainability Leadership.