House passes anti-ESG legislation as GOP targets ‘woke’ policies (Washington Examiner)
Top U.K. food firms urged to do more to cut ‘staggering’ emissions (The Guardian)
Study: Decarbonization Efforts Bring Companies $200M in Annual Net Benefits (Sustainable Brands)
U.S. Department of Energy Announces $3 Million for New Initiative to Support and Expand America’s Industrial Decarbonization Workforce (U.S. Department of Energy)
COP29 agenda to prioritize sustainable agriculture and methane reduction (Food Ingredient First)
Shipping industry incentivises methane reduction (Energy Global)
Credits: Visual Capitalist
The path forward
Many companies are scaling back their environmental and social pledges due to political pressure, underperforming ESG investments, and challenges in valuing the benefits of sustainability initiatives.
Examples include Tractor Supply Co. and Canada’s largest oil companies withdrawing from sustainability goals, and companies like Nike reducing sustainability management positions.
One of the factors driving the retreat is a backlash against ESG (Environmental, Social, Governance) policies led by conservative political groups.
Another factor is the underperformance of ESG funds compared to traditional investments, resulting in a multi-trillion-dollar shift away from ESG funds.
Many companies also find it hard to justify sustainability investments because the benefits are often intangible and difficult to quantify. For example, it’s challenging to clearly value avoiding reputational damage, future carbon taxes, or improved employee retention resulting from sustainability initiatives.
Many companies set aggressive goals without fully understanding the complexities of achieving them. Many of these goals were not feasible, leading companies to reassess and scale back their commitments. Legal pressures, like Canada’s recent crackdown on greenwashing, force some to reconsider overly ambitious targets.
In some cases, investments in decarbonization or other sustainability measures do not deliver positive financial returns. A private study found less than 15% of decarbonization investments across 30 companies yielded positive financial outcomes, discouraging further investment.
Governments and regulatory bodies are beginning to crack down on “greenwashing” when companies make misleading or exaggerated claims about their environmental efforts. For instance, Canada passed an amendment aimed at addressing greenwashing, with significant fines for non-compliance. This has led companies to retract overly aggressive sustainability pledges to avoid legal and reputational risks.
Recommendations for Moving Forward
Overall, the primary focus should be to “stay grounded in the fundamentals.” This can be achieved through the following approaches:
1. Stay Aligned with Strategic Goals:
Prioritize sustainability as a key driver of business value, innovation, and long-term resilience.
Companies recognize that the energy transition is rapidly advancing, and they are preparing by adopting scenario planning, as recommended by the Task Force for Climate-Related Financial Disclosures (TCFD).
Strong underlying factors, such as consumer demand and employee engagement, continue to fuel interest in sustainability, making it an essential source of innovation.
2. Redefine Boundaries:
Companies should focus on collaboration beyond their internal operations. Much of the environmental and social impact occurs outside of their direct control, especially in areas like supply chains (Scope 3 emissions).
Collaborative efforts with competitors and suppliers can lead to industry-wide progress. For example, Timberland co-founded the Leather Working Group, bringing together competitors to improve the environmental performance of leather production.
3. Investment for the Future:
Amid shifting frameworks, politicized criticism, greenwashing concerns, government transitions, and the threat of an economic crisis, some companies may feel pressure to scale back their ESG investments. This could lead to a “wait and see” approach, or worse, provide critics with an excuse to back away from commitments.
However, the core reasons for investing in sustainable business models, clean energy, circularity, and social equity remain as compelling as ever.
Companies that retreat now risk being vulnerable as societal and environmental conditions evolve, while those that continue to invest in the future will ultimately be rewarded.
Thus, companies should adopt a long-term perspective, especially as carbon pricing becomes more widespread. The European Carbon Border Adjustment Mechanism (CBAM) is one example of a business decision that will increasingly involve carbon pricing.
Setting an internal carbon price and adjusting corporate investment strategies to account for future carbon regulations and intangible benefits (like brand reputation) can prepare companies for a changing regulatory landscape.
While sustainability investments may not yield immediate financial returns, they are likely to become more financially beneficial as carbon regulations tighten and the impacts of climate change become more pronounced.
4. Encourage Standards Harmonization:
Companies in the U.S. and Europe are gearing up for increasing expectations and regulations surrounding ESG reporting and disclosure. Harmonizing these standards is essential to ensure consistency and a level playing field for all.
Businesses can actively support the development of frameworks that incentivize long-term value creation. Fortunately, there is an immediate opportunity to drive this alignment as the U.S. Securities and Exchange Commission, the International Sustainability Standards Board (ISSB), and various E.U. initiatives continue to evolve.
5. Reshape Governance:
Sustainability should be embedded into corporate governance structures with clear accountability. Companies need dedicated leadership and expertise in areas like decarbonization and environmental systems.
For example, Puma integrates sustainability into its executive bonuses, where 5% of bonuses are tied to sustainability goals. This creates an incentive for leaders to prioritize sustainability in business operations.
Cross-functional engagement is also crucial, but companies must ensure that sustainability responsibilities are clearly defined and not too dispersed across departments.
6. Lead Publicly and Privately:
Businesses must actively counter the cynical narrative fueled by political attacks on ESG. Leaders like BlackRock and Michael Bloomberg have already publicly reaffirmed their commitment to ESG and rejected efforts to undermine its legitimacy.
Other companies should follow their lead by publicly standing up for ESG principles.
Additionally, for those concerned about political backlash, engaging in “private diplomacy” can be an effective way to quietly push back against anti-ESG rhetoric while minimizing potential political risks.
7. Communicate with Purpose:
Terms like “ESG” and “stakeholder capitalism” have become polarizing. Instead of focusing on these labels, shift the conversation to key business drivers such as innovation, risk management, resilience, and future-proofing.
Emphasize how sustainability is essential to addressing critical issues like climate change, economic and social equity, human rights, and governance, which are vital to long-term business success. This approach can help highlight the tangible benefits of sustainability while avoiding contentious terminology.
8. Maintain Focus on Incentives:
Boards and executives can drive continued progress by ensuring that sustainability performance remains integrated into compensation and accountability frameworks.
The inclusion of ESG performance in both short-term and long-term incentive structures is critical. By upholding these principles, business leaders can reinforce their companies’ commitment to creating long-term value for all stakeholders while keeping sustainability a key focus of their strategic priorities.
9. Advocate for Systemic Change:
No single company can change market rules or address externalities like carbon emissions alone. Therefore, companies should advocate for legislation that sets industry-wide standards, ensuring a level playing field and greater accountability.
For instance, companies like Apple and Exelon withdrew from the U.S. Chamber of Commerce over disagreements on climate policy, highlighting the need for aligning corporate and industry-wide sustainability goals.
Conclusion:
Companies must temper their sustainability goals, replacing lofty ambitions with practical, actionable steps. Collaboration, long-term investment, and clear governance are essential for sustainable success, especially in industries facing regulatory and environmental pressures.
Beatriz Canamary
Beatriz Canamary is a consultant in Sustainable and Resilient Business, Doctor and Professor in Business, Civil Engineer, specialized in Mergers and Acquisitions from the Harvard Business School, and mom of triplets. Today she is dedicated to the effective application of the UN Sustainable Development Goals in Multinationals.
She is an ESG enthusiast and makes it possible to carry out sustainable projects, such as energy transition and net-zero carbon emissions. She has +15 years of expertise in large infrastructure projects.
Member of the World Economic Forum, Academy of International Business and Academy of Economics and Finance.
