It is hard to overstate the profound impact that ESG and sustainability have had on the business landscape in recent years. Unprecedented public awareness of climate change, coupled with leading financial institutions conditioning access to capital on companies demonstrating strong ESG standards, has brought these issues from a specialist area into a priority for boards and leadership teams across nearly every sector.
The Backlash Against ESG
However, all is not well in the realm of ESG and sustainability. A growing backlash has been building for quite some time, fuelled by rampant greenwashing, a realisation that the presumed link between ESG practices and profitability may have been overstated, and a sentiment — particularly in the United States — that business is becoming ensnared in “woke” politics.
Rethinking Our Approach to ESG
ESG has veered off course. This view may surprise some who know me as an “ESG pioneer” and have heard me advocate for industry’s role in resolving pressing global challenge at forums like COP and the World Economic Forum. However, business cannot solve these issues alone. It has to operate within confines of market economics and regulation. To unleash the innovative force of business, we must refocus the ESG debate on areas of material impact, and policymakers and regulators must step up, take difficult decisions, and create the right incentives. The US Inflation Reduction Act serves as an example of proactively shaping those dynamics, leading several of the world’s most successful green companies to gravitate toward the US. To maintain competitiveness, Europe must follow suit. In the words of a friend and European finance minister, “We have already solved much of the climate crisis, technically. We just can’t seem to solve it politically.”
The Future of ESG: More, but Different
Despite the backlash, claims that “ESG is dead” should be taken with a big pinch of scepticism. ESG has catalysed a real paradigm shift, and there’s no turning back. The future will see more ESG, not less, but it will be different. Business leaders who wish to remain competitive in this evolving landscape must adapt with a sense of urgency to stay ahead of the curve. Looking ahead, three critical shifts can be anticipated:
From Voluntary Standards to Mandatory Compliance
The proliferation of ESG standards has been overwhelming. A 2021 study by E&Y identified 600 different standards. With such a vast smorgasbord of pickings, it has been far too easy to superficially create the appearance of “good ESG” by merely signing up. This will consolidate into fewer, better, and mandatory rules. Initiatives such as the EU’s CSRD (Corporate Sustainability Reporting Directive) and SFDR (Sustainable Finance Disclosure Regulation) will enhance transparency and focus, level the playing field, and shift the perception of ESG from reputation management to compliance and risk management.
Increased Focus on Behaviour and Specific Impact Targets
As an advisor I often meet leaders committed to making a constructive contribution but unsure where to start or focus. Surveys reveal that up to 75% of CEOs lack confidence in their ESG strategies being fit for purpose and aligned with long-term objectives. I often recommend shutting out all the external noise by re-articulating ESG from “Environmental, Social & Governance” to “Environmental & Social Governance.” This shift is not mere semantics; it is a powerful tool to crystallise the critical question: “What are our primary environmental and social impacts as a business, and what governance tools can we deploy to minimise undesirable impacts and
maximise desirable ones?”
ESG should not primarily be about what you do, but how you do it. The oversimplified notion that certain sectors constitute “bad ESG” has proven disastrous. It has forced companies with worldclass environmental stewardship to sell off ‘dirty’ assets to less prudent operators to not be excluded from access to capital, and has led to underinvestments in the energy sector that have contributed to European cost- and energy-security crises. Any business that demonstrates genuine commitment to identify and optimise environmental and social impacts, and does its best to move the needle in the direction of a more sustainable future should be encouraged, not penalised, and should pass the “ESG red-face test” with investors, policymakers, and civil society.
Stakeholder Management as a Priority
As ESG becomes more disclosure and compliance oriented, competitive edge will increasingly lie in how businesses manage stakeholder relations. How well they articulate value propositions, attract resources, and build “political and social license” with stakeholders more demanding and better equipped to scrutinise impacts. The transition to a more sustainable future promises increasingly complex relationships at all levels. Especially in sectors with significant geopolitical, environmental, and social impacts, such as the maritime, energy, and infrastructure sectors where failing stakeholder relations frequently constitute primary reasons for delays or failure.
Final Remarks
Today represents an unsettling race against time in many aspects, yet it is also an exciting period for business leaders. Competitive advantage is increasingly less about financial and operational resources and more about mindset and strategic clarity. Companies that embrace this complex and ambiguous landscape by adopting new ideas and methods, and successfully integrate diverse experiences and expertise into their leadership ranks will punch far above their weight. They are more likely to turn prevailing risks into real opportunities for growth and value creation.
Blog written by Rikard Scoufias
Rikard Scoufias is a board advisor and the non-executive chairman of Greece’s national energy resources company. During his tenure, the state oil & gas company has undergone a significant transformation into a diversified group involved in gas exploration, offshore wind, decarbonisation, and infrastructure. With over 20 years of international experience in strategic and operational roles, Rikard has managed high-stakes political and stakeholder relations on five continents, and is widely recognised for his contributions to handling “license to operate” risks, ESG, and the energy transition. Previously, he served as Country CEO for the Trans Adriatic Pipeline, and was before that a member of BP Plc.’s senior leadership team responsible for BP group’s Government & Corporate Relations in Europe and several of the company’s most challenging global assets.
