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Attract Capital, Not Controversy: How to Do ESG Right in the Current Landscape

Just last month, on January 10, 2025, the U.S. District Court for the Northern District of Texas ruled that a major American company had violated federal law by taking into account ESG considerations in the management of its employee retirement plan.¹ According to the ruling, it had breached the law by allowing asset manager BlackRock to incorporate non-financial factors into its investment strategy, despite the fact that it appears that none of the company’s 401(k) assets were in ESG funds.² The ruling singled out the company’s relationship with BlackRock — the world’s largest investor and a leading proponent of ESG – with the judge adding that the company’s “own corporate goals disloyally influenced administration of the [retirement] Plan[s].”³

This decision has sparked sensationalized headlines, swirling with speculation that ESG is now dead⁴ or “illegal.”⁵ Although rulings like this can easily be misconstrued as a referendum against ESG — especially in the current political landscape where anti-ESG rhetoric is gaining traction — it certainly does not spell the end of such corporate commitments and investment strategies. Reality tells a much different story. Sustainable investment is not only holding strong, but continues to grow at an unprecedented pace. According to Morningstar, global sustainable funds reached a record $3.2 trillion in assets under management at the end of 2024.⁶ This represents an 8% increase since 2023 and 400% increase since the end of 2018, far outpacing other equity asset categories.⁷

There is no disputing that the ESG landscape continues to evolve. It has since its inception, as most new ideas do when going from concept to practice. But ESG is not going away. If your company is approaching ESG with a focus on risk mitigation and value creation, while taking the right steps to monitor political and economic developments around it, you will have a lot more to gain than to lose in pushing ahead.

Weathering Shifting Winds

The past few years have seen ESG attract growing criticism from a range of political and business figures who have expressed skepticism and doubt over the value of such programs. Much of this criticism is based on the notion that ESG initiatives are nothing more than just a pretense to push a “woke” agenda or to signal virtue. And it should come as no surprise that political priorities will change as power shifts in Washington. Under the new Trump administration, anti-ESG laws and executive actions are moving at pace. It appears at this point that the SEC’s proposed climate rule may be dead in the water, and, through a series of Trump executive orders, the United States has exited the Paris Agreement,⁸ there is now a sweeping mandate against DEI,⁹ and some of the funds from Biden’s Inflation Reduction Act have been temporarily paused.¹⁰ This political football is taking place at the state level too, with 18 states having adopted anti-ESG laws as of July 2023.¹¹

Despite all of this, such developments do not spell the death of ESG. California has already passed its climate disclosure rules, which apply to companies operating in the state.¹² More recently, 24 states declared their commitment to the targets outlined in the Paris Agreement,¹³ and global regulations such as the Corporate Sustainability Reporting Directive (“CSRD”) continue to be in force, impacting U.S. companies with EU exposure.¹⁴

Even if we look away from politics and the shifting power grab between states and federal government, the most important thing to remember is this: if you are using your ESG program to focus on the factors that impact value, then you have nothing to worry about. Such initiatives must be laser-focused on ways to mitigate risk and drive business growth. ESG can be a useful tool in de-risking supply chains, reducing waste and therefore cost, minimizing expensive accidents and operational disasters, attracting and retaining talent and generating innovative products and practices, among many other aims. Companies that demonstrate these value initiatives as part of their overall business strategy are the ones that investors seek out.

According to Morningstar, it is true that Europe accounts for more than $2.5 trillion (around more than 80%) in ESG-related assets under management globally.¹⁵ This is no surprise given the nearly decade-long head start they have over the United States and other regions around the world. However, even though the United States accounts for only 11% of ESG assets under management globally, this figure has risen dramatically over the past few years.¹⁶ More importantly, most U.S.-based asset managers integrate ESG factors into their investment decisions, even if they do not call it out explicitly by that name. To them, ESG is not an altruistic mandate but rather a risk management tool used in combination with more traditional methods to make smart investment decisions. For example, 61% of asset owners in North America stated that ESG is a material consideration and that it goes “hand in hand with fulfilling their fiduciary duty.”¹⁷

Where Do You Go From Here?

Given that ESG is here to stay — regardless of what name it goes by — companies would be wise not to immediately pivot away from it due to fear around emerging headlines. Today’s economic and political considerations are not guaranteed to hold as much sway in the future, and much could change in a matter of months or years, so any strategy that corporates undertake should be authentic and intentional. Corporations must thoughtfully implement compliant and future-proof ESG programs that are defensible and capable of withstanding scrutiny, no matter who comes to power in Washington or how the ESG landscape continues to evolve.

No doubt, recent developments indicate that companies will need to tread carefully around ESG in the current environment. But with the right steps, they can weather the volatile political and economic landscape. Recommended steps include:

Avoid overreacting to political or legal headlines. ESG has been evolving since the beginning, and it should be expected to continue to do so.
Deliberately implement ESG initiatives that align with business objectives. If ESG is used as a cultural signaling device for communications purposes, you are at risk.
Communicate transparently around ESG, framing it both in terms of value and risk. A major component of this is avoiding politically-charged language.
Remain agile while ensuring that ESG serves as a rational and strategic tool for long-term success. This will be key amid a complex political and regulatory landscape.
Monitor state-level developments. The political and economic landscape will continue to evolve on both a federal and state level.

ESG may be attracting more attention — and controversy — than it has in the past. But, as this article shows, there are trillions of dollars of capital available for companies that focus their ESG programs on risk mitigation and value creation. At the end of the day, the fact remains: If you’re doing ESG the right way, then you have much to gain and nothing to worry about.

Footnotes:

1: Austin Ramsey, “Airline ESG Ruling Imperils Work of BlackRock, 401(k) Managers” Bloomberg Law (January 14, 2025).

2: Matt Levine, “Maybe ESG Is Illegal Now” Bloomberg (January 14, 2025).

3: Leah Malone, Erica Rozow, Alexis V. Capati, George M. Gerstein, "Memorandum" Simpson Thacher (January 13, 2025).

4: Aiden Buzzetti, “Final Nail in the Coffin for ESG” The Washington Times (January 27, 2025).

5: See supra note ii.

6: Hortense Bioy, et al., “Global Sustainable Fund Flows: Q4 2024 in Review” Morningstar (January 27, 2025).

7: Ibid.

8: “Putting America First in International Environmental Agreements” The White House (January 20, 2025).

9: “Ending Radical And Wasteful Government DEI Programs And Preferencing” The White House (January 20, 2025).

10: “White House says order pausing IRA disbursements only applies to some programs” Reuters (January 22, 2025).

11: Lance C. Dial, Daniel F. C. Crowley, Jennifer R. McCoy and Brenden R. Chainey, “2023 ESG State Legislation Wrap Up” K&L Gates (July 25, 2023).