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Environmental, social and governance investing is under attack.

ESG rode a wave of excitement in the first two years of the pandemic, as the financial world turned its focus to society’s vulnerabilities and sought ways to fund solutions to things such as climate change and racial inequity, while also generating fees. It’s become an asset class unto itself, with money in mutual and other investment funds topping US$2.7-trillion globally.

Now though, ESG is attracting powerful enemies, some of whom decry the field as a left-wing plot to hamstring commerce, and prompting some well-known finance leaders who have supported the concepts of sustainability to soften their stridency. A portion of the general public, weary of COVID-19 restrictions, surging costs of living and instances of greenwashing, has also grown skeptical.

It feels like a crossroads. If so-called stakeholder capitalism is going to become just everyday capitalism, businesses themselves will have to show that their efforts to align investments with the goals of the Paris Agreement on limiting greenhouse gas emissions, and other environmental and social imperatives, are serious and worthwhile. It’s only become tougher with the economy under strain.

It’s clear regulators and governments that have pushed increasingly stringent rules for disclosure of ESG factors are feeling the heat, and could be pressed to ease off, risking some important advancements.

The main battleground has been the United States, where top Republicans have pushed back against portfolio managers that have screened out investments in fossil-fuel producers. Last year, Texas lawmakers passed a law penalizing firms for eschewing oil and gas holdings by preventing them to do business with the state’s pension and investment funds. Other states are now considering similar legislation.

Russia’s attack on Ukraine has only hardened opposition to businesses that take a pro-climate stance, as sanctions slashed volumes of oil and gas on world markets and demand from Western sources has surged in the name of energy security.

In an energy policy speech last week, former U.S. vice-president Mike Pence cited the successful campaign by hedge fund Engine No. 1 last year to force Exxon Mobil Corp. to take a more serious approach to climate-related risks as an example of ESG thwarting business goals. Mr. Pence, a potential presidential candidate in 2024, said three directors that Engine No. 1 nominated to the Exxon Mobil board are now working to “undermine” the company.

ESG is becoming a target for factions of the U.S. political right alongside other widely misunderstood concepts, notably critical race theory, which studies how racial bias is part and parcel of legal, educational and other institutions, and how that has led to systemic inequality.

In this year’s letter to CEOs, Larry Fink, chief executive officer of BlackRock Inc., took pains to explain that his brand of stakeholder capitalism had nothing to do with left-wing “woke” politics. Instead, the head of the world’s largest asset manager said it is all about “mutually beneficial relationships” with employees, clients, suppliers and communities where companies operate. This is just capitalism, he said.

To be fair, the ESG world has caused some of its own problems. First, it has trouble defining itself. Companies must navigate a series of byzantine metrics and competing reporting standards on everything from climate risk to boardroom gender diversity to satisfy investors, regulators and governments. Despite current efforts aimed at fixing this problem, including the establishment of an International Sustainability Standards Board, there remains an “alphabet soup” of requirements.

Meanwhile, what constitutes ESG is a moving target, as different agencies that issue reports on corporate ESG performance use differing measures for numerous factors with varying weightings for each one, which can result in one company simultaneously being judged an ESG leader and a laggard.

Worries about greenwashing in the financial world have prompted regulators, such as the U.S. Securities and Exchange Commission and Canadian Securities Administrators, to demand more stringent reporting about climate-related risks. But those bodies too are taking flak.

Republican members of the House financial services committee are accusing the SEC of overreach by unilaterally mandating tougher climate disclosure rules, and are calling for a full hearing on the issue. Canadian regulators are wrestling with how stringent their emission disclosure regulations should be.

Still, the climate crisis remains, as does inequality in the workplace and a host of other problems that ESG principles are designed to counteract, and for which consumers are demanding solutions. These are not left-right issues but common ones.

It will be up to business to show expending resources to achieve progress in those areas can help generate financial returns, instead of hinder them. That’s a tall order in a shaky economy and falling market, when the attacks are intensifying.

Jeffrey Jones writes about sustainable finance and the ESG sector for The Globe and Mail. E-mail him at

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