ESG

Woke Capitalism Gets Mugged by Reality

In 2023, ESG is under pressure. Will it survive?

By Michael Moran

Over the past year, the ground beneath the feet of those most responsible for driving ESG (environmental, social, and governance) initiatives in global corporations and financial institutions has shifted.

ESG is an investment strategy based on the theory that corporations that adhere to certain environmentally and socially conscious strategies are not simply admirable but also make for better investments. To be sure, plenty of skepticism surrounds the idea that capitalism—the engine of so much of the carbon emissions in the first place—can really be part of the climate solution. But until this year, it seemed like those voices would lose out.

For one, the advent of ESG as an investment product had already led to undeniable changes in corporate behavior and put previously nonexistent pressure on CEOs to take issues like carbon footprint, gender diversity, pay equity, and labor rights into account. Just a short list of outcomes would include Exxon being forced by the activist investors to accept two climate activists onto its board; the divestiture of billions of dollars by state and local pension funds from the coal and firearms industries; and the sudden willingness of CEOs, once allergic to taking a public stance on controversial issues, to speak on everything from net zero to eliminating child labor from global supply chains to U.S. voting rights. Second, although flaws and contradictions abound in the way ESG is defined, the amount of money being managed by ESG funds had exploded over the past decade.

But 2022 may have slowed some of that momentum. Driven by higher prices for fossil fuels, food, and other commodities—much of it caused by Russia’s brutal war on Ukraine—the “black hats” of the ESG debate, including oil and gas producers, coal miners, and the like, found their voice. Some investors, too, who previously assented to removing what they now called “stranded assets” from their portfolios, have had a rethink. After all, why remove oil or gas stocks from your retirement plan if the rest of the market is crashing?

In turn, financial advisers who apply anything other than financial factors when judging the value of companies’ shares have faced a backlash from Wall Street to Main Street. It’s the moment ESG’s enemies have been waiting for. And so a cabal of political opportunists, petrostates, and anti-government market puritans have launched the fight of their lives. This year may see who wins—or wins this round, at least.