After years of buzz in business circles, ESG seemed to have lost some of its shine in 2023. We saw a host of new state laws looking to limit its use. Mentions of ESG on earnings calls dropped to their lowest level since 2020. Governors from 19 states joined an anti-ESG coalition and conservative members of Congress dubbed July “ESG month” as they held hearings and advanced bills aimed at limiting ESG-based investing. A major asset manager and traditional advocate of investment stewardship publicly took a step back from its ESG focus. Investor demand for ESG products cooled, as the third quarter of 2023 saw the fourth consecutive quarter of net outflows from sustainable funds in the United States.
But in our view, the market pullback on ESG is a natural and anticipated course correction, rather than a death knell. ESG is growing up, and challenging the corporate and financial sectors to grow with it. As regulators and lawmakers put investment strategies under the microscope, the economic drivers supporting the use of ESG criteria, and the need to demonstrate tangible evidence connecting ESG and investor returns, came into sharper focus. More companies than ever are offering ESG and sustainability reporting using commonly accepted frameworks. An SEC crackdown on greenwashing and related suits has led many companies to apply greater scrutiny to their nonfinancial disclosures and sustainability-related communications, with a rigor reminiscent of (though not equal to) that applied to financial disclosures.
Record high global temperatures continued to bring attention to businesses that are particularly prone to climate-related risks, and the steps they are taking in response to such risks, amidst conclusions that the carbon offset market may be broken. A landmark climate change lawsuit in the United States against state actors suggested new pathways to hold corporations accountable for perceived shortcomings in their climate mitigation efforts in U.S. courts. In the headline agreement that came out of COP28 in Dubai, nations made a historic pledge to “transition away” from fossil fuel-based energy.
From a regulatory perspective, ESG continues to occupy a divided world. In the United States, the backlash against ESG and a looming 2024 presidential election may pose hurdles, while a new era is dawning in the EU (and globally) with laws that compel increased disclosure, transparency and accountability with respect to ESG issues from companies, investors and lenders.
As 2023 comes to a close, we examine the seven key trends that shaped ESG and sustainability this year, and share what we anticipate for 2024.