Insights

ESG Is Not Dead—It Will Simply Be Replaced

ESG Skepticism Is Rising in the United States, but Sustainability Remains the Defining Imperative of Our Time

l Jong-oh Lee CIO of KoSIFㅣ

▲ A Wall Street Journal article published on January 9 under the provocative headline, “The Latest Dirty Word in Corporate America: ESG”

© The Wall Street Journal

“Many companies no longer utter these three letters: E-S-G.”

This is how a Wall Street Journal article published on January 9 begins. The article carried the provocative headline, “The Latest Dirty Word in Corporate America: ESG,” accompanied by a striking illustration of a person covering both their mouth and eyes. Taken together, the title, image and opening sentence strongly suggest that ESG has become a taboo subject in the United States.

The term ESG—environmental, social and governance—first emerged in 2004 and began to gain broader application following the launch of the Principles for Responsible Investment in 2006. ESG was originally developed from an investor’s perspective.

It later moved into the mainstream through a combination of forces, including the influence of BlackRock, the Biden administration and the COVID-19 pandemic. As companies, civil society organizations, governments and other institutions incorporated ESG into their missions and strategies, the meaning and application of the concept continued to expand.

More recently, however, skepticism toward ESG has grown, with some even calling for its complete abandonment. If those claims are correct, ESG may be facing a major turning point only two decades after its emergence.

But what is actually driving this skepticism, and are its underlying arguments valid? To answer that question, we need to examine the economic, market and political forces at work.

     The United States as the Epicenter of ESG Skepticism

The main source of ESG skepticism is the United States, often regarded as the heart of global capitalism.

In 2022, the COVID-19 pandemic was beginning to recede and an economic recovery had been widely anticipated. Instead, inflation remained high due to government relief spending, wage increases, supply-chain disruptions and the sharp rise in oil, natural gas and grain prices following Russia’s invasion of Ukraine.

In response, the U.S. Federal Reserve raised interest rates aggressively, contributing to an economic slowdown.

As a result, the number of newly launched ESG funds declined in the U.S. market, while investment outflows accelerated.

The most direct reason was weaker financial performance. The Russia-Ukraine war drove up the share prices of traditional fossil fuel companies, while ESG funds that had excluded those companies from their portfolios underperformed. At the same time, tighter regulation of greenwashing in financial products made it more difficult to launch new ESG funds.

Financial returns are a necessary condition for sustaining ESG management and investment. Poor market conditions therefore provided a convenient justification for conservative groups in the United States that had long viewed the rise of ESG with unease.

     Politically Motivated Attacks on ESG

Traditional conservatives in the United States tend to view ESG as a progressive agenda. In a society marked by deep political polarization, ESG issues—including climate change, inequality and poverty—have become part of the front line of ideological conflict.

Anti-ESG campaigns have increasingly translated into anti-ESG legislation.

According to the report 2024 Statehouse Report: Right-Wing Attacks on Responsible Investment, published by climate policy consulting firm Pleiades Strategy, Republican lawmakers introduced 318 bills attacking responsible investment in 38 states between 2021 and the end of January 2024. Of these, 37 anti-ESG bills were enacted across 17 states.

However, many of the adopted laws were significantly narrowed in scope following strong opposition from businesses, labor groups, public finance officials and environmental organizations.

The primary targets of anti-ESG legislation are financial institutions, because finance remains one of the main forces driving ESG.

The Glasgow Financial Alliance for Net Zero, or GFANZ, and particularly the Net-Zero Insurance Alliance, were heavily targeted by Republican state attorneys general and politicians. As members faced pressure over possible violations of U.S. antitrust law, the alliance’s membership fell sharply from nearly 30 companies to 11.

     Silence and Withdrawal Do Not Mean Abandoning ESG

Corporate silence on ESG and the withdrawal of financial institutions from global initiatives have strengthened claims that ESG is in decline. Such interpretations, however, are overstated.

Most financial institutions that withdrew from GFANZ have stated that their decision was made to avoid legal risk and that their policies and activities supporting net-zero goals remain unchanged.

BlackRock CEO Larry Fink’s decision to stop using the term ESG should also be understood primarily as an effort to avoid controversy arising from the political polarization of the term.

Both Republican- and Democratic-led states are major clients of BlackRock, and the public funds managed by those states are too important to abandon. The same logic applies not only to BlackRock but to most global financial institutions operating in the United States.

Their decisions therefore reflect strategic business considerations rather than a fundamental rejection of ESG. They have not abandoned ESG in substance.

Moreover, ESG skepticism remains largely concentrated in the United States and has not become a truly global phenomenon.

ESG remains firmly established in Europe and continues to expand across Asia and other regions. Despite ESG fund outflows in the United States and Japan during the fourth quarter of 2023, Europe continued to record net inflows into ESG funds.

There is also opposition to certain ESG-related laws, regulations and policies outside the United States, but the nature of those debates is different. In most cases, the legitimacy of ESG itself is broadly accepted, while disagreement centers on the scope, timing and intensity of its application.

     Korea Needs an ESG Framework Act

Korea also remains broadly supportive of ESG, although the current government has not pursued ESG policy particularly aggressively.

Corporate awareness and interest continue to grow, with major exporting companies responding more proactively. This shows that, regardless of political debate, ESG is increasingly accepted in Korea as part of the international market order that companies must address in practice.

When it comes to ESG management and investment, Korean financial institutions and companies have reached a stage of quantitative expansion. However, many ESG activities remain superficial or, in some cases, amount to ESG washing.

To improve the quality of ESG practices among Korean companies and financial institutions, laws, institutions and policies should be developed from the perspective of building a virtuous ESG ecosystem.

In this context, Korea should consider introducing an ESG Framework Act.

Such legislation should comprehensively define the roles of government and market participants, as well as the necessary regulatory and support measures, in areas including:

• ESG disclosure by companies and financial institutions
• Assurance and verification of ESG information
• ESG ratings
• Sustainable finance taxonomies
• ESG-based public procurement
• Supply-chain due diligence
• Prevention of ESG washing

▲ Jong-oh Lee,  CIO,  Korea Sustainability Investing Forum

     “Forget the Term ESG, but Do Not Underestimate the Power of the Idea”

There is a memorable line from the Korean film The Face Reader:

“I saw only the faces of people, not the face of the times. I watched the waves change from moment to moment, but I should have watched the wind, because it was the wind that created the waves.”

Terms such as ESG are merely the waves that change over time. The wind behind them is the underlying challenge of sustainability—climate change, inequality, poverty and other structural social and environmental problems.

We should not become fixated on terminology. We should instead focus on the forces and conditions that gave rise to those terms.

The playing field has already tilted toward the age of ESG—or, more accurately, the age of sustainability.

In the long history of humanity’s pursuit of sustainability, the ESG era is only one phase. We can therefore respond to anti-ESG advocates and ESG skeptics with the following:

ESG is not dead. It will simply be replaced by another term.

This article is an edited version of a column contributed to Social Korea by Jong-oh Lee, Secretary General of the Korea Sustainability Investing Forum.