As governments in the US and Europe ease their commitments to environmental and social policies, businesses are navigating a shifting landscape for ESG practices. David Benady explores. This article is from Communicate's print edition.

Ethical business is in retreat across the U.S. and Europe. With President Trump calling for “drill, baby, drill” and an end to “immoral DEI,” and the European Union relaxing pollution rules, the fight against climate change and in favour of social justice is losing governmental backing.

This represents a serious setback for the environmental, social, and governance (ESG) movement, which campaigns for businesses to assess their impact on people, planet, and profit while mitigating the negative effects. “It seems fair to predict that corporate ESG efforts will decrease, especially for global companies with a strong base in the United States,” says Zaiba Malik, founder of Coppergate Communications. She says that ESG was already rocky in Europe before Trump’s resurgence, and now it seems to be faltering even further.

Amid global economic uncertainty, high energy prices, and industries facing existential threats, Malik believes companies will push for further relaxation of the EU's complex ESG rules and regulations. But she acknowledges that delaying the green transition won’t be well received: “Communicating a possible slowdown of the energy transition with reduced green commitments is not going to be pleasant.” Backtracking on the timetable for net zero would look like a major sell-out.

With security concerns dominating Europe’s agenda and EU attention turning towards fighting a military, rather than an environmental and ethical, war, ESG issues could slip into the background. European governments are putting pressure on ethical funds to open up investments in arms firms as the drumbeat to war intensifies. Such a move could destroy the ethical stance of ESG funds. But there is a mixed picture on ESG investing. While investors pulled a record amount from ESG funds in the first quarter of this year, demand for green bonds remains strong in the U.K.

While much attention has been given to Trump’s rollback of green and DEI policies, this process was already well underway in the U.S. The EU is also watering down its green commitments, for instance, by relaxing carbon rules. In March, the EU proposed giving car manufacturers more time to hit pollution targets, relaxing the previously tight timetable for CO2 reductions.

And in February, the EU published the Omnibus package, which it claims to “simplify” the rules on sustainability reporting by companies, already diluting the shiny new rules it has recently introduced, such as the Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive. Some see this as the EU caving in to business pressure to dilute sustainability reporting.

“The ESG industry has persuaded corporate leaders that ignoring these issues creates financial, operational, and reputational hazards”

However, even after the Omnibus changes, the regulations still significantly tighten the rules on sustainability and codify the need for DEI reporting. Similarly, the U.K.’s Employment Rights Bill requires large companies to publish equality action plans. These reflect efforts to promote DEI in the workplace, even if they lack the bite some demand.

Given all of this, a stark divergence is opening between the U.S. and Europe. While America is delegitimising green and diversity policies, the EU is weakening them but still moving ahead. This creates a headache for global corporations, as they will have to adapt to multiple rules and approaches to different aspects of ESG. A complex picture is emerging, with each company and jurisdiction pursuing widely different approaches to ESG. This may reflect a new multipolar reality where corporations are forced to act locally even while they dream globally. “This means the compliance departments of multinational companies are going to be kept busy with a problematic juggling act – how to meet conflicting DEI policies while still having a consistent approach to inclusion across global operations,” says Malik. “While damned if they do in the States, then it’s damned if they don’t in Europe.”

“A stark divergence is opening between the U.S. and Europe, creating a headache for global corporations”

For instance, the CEO of Deloitte U.K. has already stated that he refuses to sunset DEI and will stay committed to the goals, highlighting a split with the U.S. office, which has vowed to end its DEI programmes. This split highlights how companies will need to adopt different strategies depending on regional pressures. Despite recent setbacks, some believe that businesses are too heavily invested in ESG to simply unwind their positions now. “It's more nuanced than saying that businesses will abandon ESG practices,” says Helen Dodd, head of sustainability at communications consultancy Instinctive Partners.

“They will continue to make sure that they are really understanding those issues which are material to their business and engaging with their stakeholders.”

She believes that there will be “more materiality, less morality,” and businesses will focus on the areas where ESG offers financial benefits and spend less time on ethical posturing. “Understanding what your most important and relevant ESG issues are and what has a financial impact on your business from an ESG perspective provides your defence for ESG focus. It becomes virtue signalling when you can't provide a clear business case and a clear rationale of why you're focusing on some ESG issues over others.”

Businesses will need to take stock and re-examine their purpose campaigns and cause-related marketing and make sure they are germane to their activities. Some wonder whether the movement may have been guilty of going too fast and failing to bring people along with them.

Last year, many companies started watering down their commitments to diversity, equity, and inclusion, which had exploded since the Black Lives Matter protests of 2021. A slew of U.S. legal cases against DEI in the U.S. centred on the programmes themselves being a form of discrimination. These have turned the area into a legal minefield in America. Following Trump’s executive order against DEI this year, companies such as Google, Disney, Meta, Goldman Sachs, Accenture, and Pepsi announced they were axing DEI.

Sceptics suggest that the companies have used the excuse of Trump’s presidency to axe programmes they never really took seriously in the first place. An alternative view is that DEI is so deeply embedded in their corporate operations that it will be rebadged under another title. Some wonder whether the backlash against ESG is driven by conservative jealousy and vexation that liberals have come up with a popular idea. But the crisis does require the ESG movement to engage in introspection. Insiders question whether ESG’s own strategies have alienated a once-supportive public, leading to scepticism, which conservatives have played upon.

“Part of the backlash against ESG suggests that the sustainability movement hasn't won the public arguments, hasn't won public hearts and minds, is in its own bubble, and hasn't succeeded in bringing people along,” says Francesca Micallef, director of sustainability advisory at Salterbaxter, which manages sustainability and corporate reporting.

Micallef says the proliferation of confusing acronyms, such as DEI – and its latest iteration DEIB (with the B standing for belonging) and ESG – have confused people with heavy technical jargon. This has been partly an attempt by ESG promoters to sound effective and bureaucratic as they seek to impress investors and businesses that everything can be measured and assessed.

The technical, bureaucratic approach also shows that sustainability claims are backed up with scientific measurements and are not “greenwash.” This is why they use a jargonistic term such as “net zero” rather than “climate friendly,” which sounds too vague. “And then you look at Trump and Farage, and they rally supporters with these big, clear, emotionally charged, simple messages,” Micallef says. “If businesses want to maintain progress, we need to reshape the narrative. We need to rebrand ESG and focus on the values that resonate with society, rather than corporate jargon.”

In future, ESG will need to continue persuading businesses to look at risks and impacts they have not usually considered and to persuade them that addressing those issues has a financial benefit. Predicting the risks of extreme weather on their business encourages companies to commit to reducing climate change with net-zero commitments. Recruitment from diverse groups ensures a supply of talent at times of labour shortages. Ensuring fair pay in supply chains heads off potential exploitation exposés in the media, which damage brand reputation.

“The fight against climate change and in favour of social justice is losing state backing”

The ESG industry has persuaded corporate leaders that ignoring these issues creates financial, operational, and reputational hazards that can damage their business in the long term. And the process of decarbonisation and environmental transformation, such as reducing energy consumption and water usage, helps cut costs and save money.

As Wendy Dobson, senior managing director in strategic communications at FTI, says: “While ESG has become more politicised in several markets, it’s important to stay focused on the fundamentals.” Dobson says that ESG is about protecting and creating shareholder value by managing non-financial risks and opportunities.

ESG programmes help companies to better understand their costs and find efficiencies, for example, more energy-efficient operations. “Markets will continue to reward companies that use ESG in a sensible way to generate shareholder value,” Dobson says, and adds: “The ‘green finance’ market is worth trillions of dollars, and it will continue to grow – albeit more slowly, perhaps – as investors back green tech, decarbonisation, and climate resilience.”

The corporate ESG community should stay focused on the fundamentals, be prepared to make the business case, and engage with detractors. There is a great need for engagement that goes beyond slogans and jargon and that seeks common ground about the desired outcomes of ESG. While people working in this space need to build support networks and alliances, they also need to avoid insularity and really listen and understand what all stakeholders are saying, she argues.

While conceding that ESG has had knockbacks recently, she remains optimistic about the future. “ESG is experiencing a course correction. The pendulum will shift back again as the costs of climate change and nature loss continue to mount and become unavoidable.”