In recent years, you’ve likely witnessed the rise in opposition towards ESG and DEI initiatives. Right-wing detractors have labeled ESG and DEI “woke capitalism” for their focus on non-financial business considerations. This backlash has been seen largely in legislation and among Republican talking points. In 2023 more than two-thirds of U.S. state legislatures considered anti-ESG legislation, with 14 states enacting laws restricting public investment or procurement processes from considering ESG factors. Concurrently, the number of DEI jobs in the U.S. workforce peaked in early 2023 and has since declined.

This may provoke worry for those of us in the industry, but the fact of the matter is that ESG and DEI aren't going anywhere for one simple reason: corporations are fundamentally rational entities, and ESG and DEI deliver business results. 

To maximize long-term growth, businesses seek to create an operating environment that is as low-risk, predictable, and consistent as possible. Embedding ESG and DEI principles into business operations allows companies to do just that: align with the evolving needs of the consumer, meet intensifying regulatory requirements, and preempt supply chain threats. By addressing the people and planet impact of businesses, companies are simply building resiliency and relevancy.

Risk reduction and predictability

The current ESG backlash ignores the fact that climate change, biodiversity loss, and social inequity pose material and financial threats to businesses, now and in the future. Enumeration and reduction of material business risks is a central, fiduciary duty of a corporation’s Board of Directors and senior leadership. Much of a company’s annual 10-K report is therefore dedicated to risk factors, which often include climate-related risks. 

Negative impacts from climate change can seriously threaten a business’s continuity of operations, from flooding of roadways needed to transport goods to droughts affecting agricultural outputs. Climate change poses physical risks to business operations and supply chains that stand to disrupt service. 

Likewise, companies need to understand the political and societal risks, known as transitional risks, to their business from a more climate-friendly future. Americans’ understanding and attitudes have shifted over time, increasingly in support of action on climate change. From 2008 to 2020, there was a 14 percentage point increase in surveyed Americans saying they felt global warming would harm people in the U.S. And a 2023 survey of over 10,000 U.S. adults by the Pew Research Center found that 67% of Americans feel that large businesses and corporations are doing too little to reduce the effects of global climate change. While some politicians may be currently railing against the emphasis on ESG, the evidence shows that public opinion overall favors a more proactive stance on climate change — something smart companies are unlikely to ignore. 

Consistency

Conventional wisdom says that companies want as little regulation as possible. But what’s more accurate is that they desire consistency of regulation. Large companies exploit economies of scale in volume manufacturing, so having one standard, even if it’s a higher standard, creates more operational efficiency. One noteworthy example of this is in the automotive industry. In 2019, when the Trump Administration sought to roll back Obama-era fuel economy standards on passenger vehicles, 17 automakers signed a letter urging the administration to set a higher, universal standard than what was proposed saying, “For our companies, a broadly supported final rule would provide regulatory certainty and enhance our ability to invest and innovate by avoiding an extended period of litigation and instability.” 

Financial results

Ultimately, companies invest in things that make them more profitable. A 2024 IBM report of over 5,000 companies found that those which embedded sustainability throughout their operations were 52% more likely to outperform their peers on profitability and enjoy a 16% higher rate of revenue growth. Additionally, a recent report by the non-profit As You Sow found that higher percentages of non-white executive leaders were positively correlated with a number of financial metrics, including growth rate, income after tax, and return on investment. 

This isn’t to say companies haven’t reacted to the backlash. So-called “greenhushing”—where businesses minimize external communications about their ESG or DEI efforts as a result of backlash—is now common, with some companies now shifting their language from the terms “ESG” and “DEI” to softer terms like responsible business or sustainability, while quietly continuing to do the work. One 2023 survey of asset managers and institutional investors found that while none of them planned to stop incorporating ESG considerations into investment decisions or offering ESG-focused or impact funds, 30% planned to be more guarded about disclosing their ESG-related activities in external materials.

‍The bottom line

The current backlash against ESG and DEI may win politicians points in the short-term but most corporate leaders understand that investing in ESG and DEI is better for their long-term success — and they intend to continue working on it, even if they quiet down about it for now. 

As our client, Alana Spencer, Vice President of Sustainability at Clayco, a full-service real estate and construction firm put it, “The chatter of the ESG backlash is not hindering our progress on sustainability, social impact, safety, and governance — we are guided by responsible impact. We are moving forward because it’s what’s best for employees, clients, communities, and future generations.”

Finally, one caveat noted in the IBM article is worth heeding. While measurement and reporting are critical to a transparent approach to sustainability, they do not replace the robust development of an ESG or sustainability strategy that is linked with corporate strategy. (And if you need help with that, we’re here ;) ).