Even though the ESG movement is growing in public recognition, the various challenges that ESG is facing today are continuously mounting as well, to the point that we’re in turbulent times. Stakeholders demand both corporate accountability and transparency when it comes to social problems. As a result, companies, governments and supporters of ESG are in a unique position to grow the movement, face the various challenges that come with it, and deal with the number of threats that stand to impair the movement.

Here are some of the prominent threats that could grow if not addressed in 2023.

1. Anti-ESG Forces

We’re seeing this problem notably in the US, with sustainable investing unleashing a flurry of criticism. It’s gotten to the point where the Republican party has started to pay close attention to the movement and accused it as ‘woke’.

The threat that is presented here is more that it would frame conversations with those not familiar with ESG or sustainable investing. Between Congress - now controlled by Republicans - conducting hearings to attempt to discredit ESG, and general fear-mongering tactics, it may result in the slower adoption of ESG values.

For example, Florida has already decided to pull USD 2 billion from the asset management firm BlackRock because of this. Other treasurers who don’t agree with ESG values might easily follow suit as well. 

This in turn jeopardises returns, as the world is slowly changing from fossil fuels to clean energy. And because those government funds are derived from taxpayer contributions, it’ll be the public that will ultimately suffer from, and pay for, these decisions.

2. Climate In-Action

The emblematic event that presented this threat was COP27, where fossil fuel lobbies continued to raise their voices and halt talks of countries changing over to cleaner energy. As a result of their efforts, COP27 amounted to the creation of a fund to help poor countries manage climate-related damages. This is a drop in the pond compared to the progress other COPs made in the past - such as the Paris Agreement of 2012.

Combined with the fact that COP28 will be held in the petrostate of the United Arab Emirates, the sentiment is that major climate headway is unlikely due to intensified lobbying. There are already reports of the state-owned oil company inserting employees in COP28 management roles. This is a major imposition to continued progress as we witness extreme weather and record-breaking natural disasters, costing countries millions or billions in damage.

3. The Greenwashing Problem

May 2022 marked the German raid of the Deutsche Bank and its asset manager DWS, solidifying that greenwashing tactics as both a bad marketing practice and holding hefty penalties and fines. Because of the raid, there was a lot of discussion around greenwashing and how companies can deal with this issue with their programmes.

Because of this, regulators are now working hard to address this issue and that landscape can change later this year. But for now, there aren’t any clear guidelines or avenues to mandated regulation.

And where things are right now is incredibly confusing.

As more greenwashing accusations intensify, regulators will need to work quickly on clamping down on misleading ESG claims to protect end investors.

4. A Lack Of Standards

To further exacerbate the greenwashing issue, there is also a distinct lack of ESG disclosure procedures, despite the probability we will soon enter a much firmer landscape of disclosure policy beyond voluntary action. Both government and businesses alike have their views on what ESG is and how ESG projects ought to be measured.

As a result, the general public and investors are seeing, in real-time, companies presenting ESG projects and making modifications slowly and steadily as government regulations and policies are passed.

We’re at a point where there is a consensus on what is and isn’t ESG, but the finer details are most important and investment product disclosures are all about the details. This gets further complicated when dealing with larger corporations that have international agreements and standards.

5. Underperformance of ESG Securities

The final threat to ESG is whether or not ESG values will make a tangible difference. One of the underlying themes of the anti-woke movement from Republicans is the idea that investing in fossil fuels and the same businesses as they have done before is a more sensible idea than whatever ESG has to offer.

And to a degree, they are right at this moment.

In 2022, ESG fund performance did suffer, as ESG funds underweighted energy and overweighed technology. 2023 may prove tumultuous. Even though investing - regardless of what ideology you have - is going to allow fluctuations in the short term, the underperformance does fit into the current narrative of those who oppose ESG.

Long-term, however, they most certainly will lose, as sustainability is more of a long-term investment strategy that will pay off years later, with compounded benefits across the ESG value spectrum. Any sensible investor knows this, but the threat is clear that not everyone thinks that way.

Action, Time, And Policies Will Solve It

At this current stage, change is already deeply rooted in various places around the world. ESG is feeling threatened at this point, but it’s not going to be stopped as a result of these threats. Even so, these threats serve as a hindrance to faster adoption and we can see evidence of this.

One good example is the fact many companies are not making their ESG projects public out of fear of political or public backlash. This is a result of steady politicisation of environmental, social, and governance issues in business, and in many countries, of conservatives proactively controlling the narrative.

Small threats as they may be, they can’t be ignored when a movement is this large. For real change, we need to be taking action in our own ways, ensure policies and regulations are put in place, and we give people the time and space to process and accept it.

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