THE ESG DEBATE: 'Woke Investing' Isn't Going Away

The ESG label has taken on toxic overtones in American politics. But banks and business leaders are increasingly investing sustainably for bottom-line reasons, not ideological ones.

- ERIKA FRY

Earlier this year, the future looked as if it could only get brighter for ESG, the increasingly widespread practice of considering environmental, social, and governance factors in business and investment decisions. In investing, the field was coming off a record-smashing 2021, with $649 billion flowing into ESG-focused funds globally, according to Morningstar Direct

By one estimate at the time, a third of the world's assets under management, including the money of growing numbers of huge public pension funds, were invested according to ESG principles. Often branded as the movement the planet needs at a time of climate change, widening inequality, and other social problems, ESG has resonated especially with younger generations so much so that business schools, including Wharton, have launched ESG-focused MBAS.

But if 2021 was ESG's breakout year, 2022 has marked the start of its awkward adolescence a messy period of confronting critics and figuring itself out.

At least part of that identity crisis is a marketing problem. Originally conceived as a longer-term profit maximization strategy, based around the idea that a melting, conflict-riven planet is bad for business, ESG has recently gotten sucked into conflicts over values and thus, into America's culture wars.

ESG strategy is fundamentally about assessing how external factors could impact a business (How might coastal flooding affect my factory? How would a more diverse team affect performance?), rather than the business's impact on the wider world (How might my factory be polluting the planet? How might diverse hiring address inequalities?).