Two decades ago, the United Nations launched a new era in socially responsible investing with its paper Who Cares Wins: Connecting Financial Markets to a Changing World.
It kickstarted a new trend in business, one where the environmental, social and governance (ESG) impacts of businesses were increasingly integrated into financial analyses.
By 2018, ESG was booming. Between then and 2021, ESG funds were expanding, and companies were clambering to get involved.
This growth was — at least in part — fuelled by asset managers like BlackRock promoting ESG offerings, but it was also a response to regulatory pressures from governing bodies like the EU.
Then, of course, there was a surge in demand from retail investors who saw both ethical and financial value in sustainability-focused investments as consumers became increasingly conscientious.
However, in recent times, it has felt as though the tide has started to turn.
According to Morningstar's analysis of global sustainable fund flows, the US has seen consistent ESG outflows since the second quarter of 2022.
Firms including Janus Henderson Group and State Street have moved to liquidate ESG mutual funds, while European inflows have stagnated between US$5bn and US$18bn over the past six quarters.
Something is not quite right. A backlash against so-called 'woke capitalism' in the US, which began in 2021, has also accelerated the trend.
US President Donald Trump's second election in November 2024 has only expedited the process.
Elon Musk, a key part of President Trump's cabinet, has previously called ESG a “scam” and “the devil.”
In the wake of this trend, David Metcalfe, CEO of Verdantix has spoken out, announcing the passing of ESG.
But David does not mean that sustainability as a whole should be forsaken, quite the contrary. He is instead advocating for something akin to a rebrand.
How recent political shifts have reshaped ESG strategies
Since December 2024, major players such as Bank of America, Citigroup and Morgan Stanley have withdrawn from the Net Zero Banking Alliance.
Beyond the financial sector, major corporations including Google, Meta and Target have either eliminated their diversity, equity and inclusion (DEI) policies or scaled back their commitments.
In the regulatory landscape, mandatory federal climate and ESG reporting rules in the US are unlikely to take effect before 2030.
In a blog titled Goodbye ESG, Hello Big and Small Sustainability, David suggests that for these events to coincide with Trump's re-election is no coincidence.
He also looks to Europe, where the first wave of Corporate Sustainability Reporting Directive (CSRD) reports have been released by firms such as Philips, Sanofi and Unilever.
However, the European Commission is now attempting to simplify sustainability reporting requirements, potentially weakening enforcement and reducing applicability to smaller businesses.
In short, there is a great deal of uncertainty in the West surrounding sustainability right now, which has raised concerns about the future direction of ESG regulation on both sides of the Atlantic.
Is ESG becoming a toxic brand for business?
For companies offering ESG-related software and consultancy services, adapting to these shifting dynamics has been and will be crucial.
David suggests that, in the US, businesses operating across multiple Republican-led states or serving the federal government must reconsider their branding when it comes to ESG.
For David, the term ESG has become politically charged and, in many cases, detrimental to business. One needs only to look at the flurry of DEI controversies to come from the US recently to ascertain this.
And in Europe, David believes that companies have never fully embraced the ESG label.
According to Verdantix survey data, European business leaders see it as a US-centric concept focused on financial risks rather than a broader, more holistic conception of sustainability.
The CSRD's emphasis on double materiality — considering both financial and external environmental impacts — makes the ESG framework seem incomplete in comparison.
As a result, many European firms may view the removal of ESG branding as a positive step rather than a retreat.
Ida Bohman Steenberg, CSO of Finnish tech giant Tietoevry, is an advocate for the power of CSRD.
“[It] gives us a common language,” she explains. If David's analysis is to be believed, perhaps the same cannot be said for ESG.
The future of sustainable investments
So, if ESG is truly on the decline, then what will the response be from the corporate world?
David believes it will be a little fragmented.
For him, sustainability initiatives in the US will continue but will be reframed within a financial risk and opportunity framework.
As climate risks like wildfires, hurricanes and droughts persist, companies will still have to account for environmental threats. That much is unavoidable.
Likewise, Fortune 500 firms are unlikely to abandon worker health and safety programs altogether, and supply chain resilience will remain a priority — particularly during this period of uncertainty about trade and tariffs.
However, without regulatory mandates, sustainability governance will remain decentralised and fragmented across corporate functions, which threatens to limit the scope of industry-wide sustainability.
“Fortune 500 firms may straddle this divide but policy headwinds in the US give no reason to expect transformational strategies,” David explains.
He believes that things will be different in Europe, though.
He expects the continent to move towards greater centralisation of sustainability governance as post-Omnibus regulatory frameworks take shape.
Large companies — those with more than €5bn (US$5.2bn) in revenue — will continue to pursue transformation strategies, pushing for ambitious sustainable initiatives.
Adapting to a divided landscape
So, if not ESG, then what?
Michael Rasmussen, CEO of GRC Report, is philosophical about the semantics of sustainability.
“Ultimately, ESG, in my perspective, and with that sustainability, is summarised in one word: stewardship,” he says.
“Each organisation needs to decide its commitment and commitment to be stewards of the environment. Stewards of its social communities. And stewards of the organisation, its resources and how it is run.
“In the words of my favourite UK Premier League coach and philosopher, Ted Lasso: ‘Doing the right thing is never the wrong thing.’”
David believes that solution providers must now tailor their approaches to the vastly different sustainability priorities emerging in the US and Europe.
In the US, he believes that sustainability investments will be driven by financial risk and operational resilience, with an emphasis on maintaining profitability in an increasingly politicised environment.
In Europe, he foresees businesses integrating sustainability into core corporate governance structures as they respond to evolving regulatory requirements.
Whether ‘big sustainability’ or ‘small sustainability’ prevails, one thing is clear: the future of corporate responsibility will not be dictated by a single acronym.
It’s not as if sustainability hasn’t gone through this rigmarole before. After all, ESG replaced CSR as the mot du jour in years gone by.
“The language is definitely changing for ESG and sustainability,” explains Kim Knickle, Research Director for Sustainability & ESG at Verdantix.
“But the work is still happening.”
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