The Evolution of ESG: Tomorrow’s Landscape Demands a New Approach

From a niche specialism to the global stage, ESG (Environmental, Social and Governance) is evolving at pace. The future promises fewer standards, more regulation, and increased focus on real impacts – and will demand more from ESG leaders shaping impactful, transformative journeys.

Jennifer Skylakos, Head of DHR Global’s Sustainable Infrastructure & Energy Practice, and Rikard Scoufias, Non-Executive Chairman of Hellenic Energy Resources and longtime ESG pioneer, dissect the macro-economic and geopolitical triggers that have shaped the corporate responsibility debate over recent decades, and look at what the future may hold.

January 3, 2024

Evidence suggesting “better ESG” equals “better returns” has attracted the world’s financial institutions with an irresistible value proposition — “do better by doing good”. According to Bloomberg Intelligence, $50 trillion, a third of global AUM, is now subject to one form of ESG criteria or another. But dark clouds are gathering over ESG. Too much greenwashing, unsubstantiated claims and attempts to squeeze “ESG” into just about anything have fueled sentiments that it is more about marketing and branding than a genuine effort to govern environmental and social impacts more responsibly. Tomorrow’s ESG landscape will be more transparent but also demand stronger commercial and strategic acumen from practitioners.

ESG might not have been on your radar 10 years ago, but that doesn’t mean it’s a new phenomenon. The “corporate responsibility” debate has a long history of peaks and troughs, originating in sectors with large environmental or socio-economic footprints like energy, mining, and infrastructure. Each resurgence of the “corporate responsibility” debate can be linked to specific macro-political or macro-economic triggers, like capitalism’s victory over communism in the ‘90s, corporate governance scandals in the early ‘00s, or the global financial crisis. The trigger this time is climate change. What has propelled ESG into a top priority far beyond those industries into a priority in virtually every sector of business today?

However, dark clouds are gathering over ESG. The singular focus on ESG has led to rampant greenwashing (environmental), blue-washing (social), and virtue signaling.

Firstly, climate change affects everyone — from the Pacific Island communities under threat from rising sea levels to scorching temperatures leaving Californians, Canadians, and Mediterranean citizens fending unprecedented wildfires. What’s more, the climate crisis coincided with additional macro triggers: if the climate represents the “E” (for environmental) in ESG, then the COVID-19 pandemic exposed social vulnerabilities and helped elevate the “S” (for social). In addition, a more socio-politically conscientious Gen Z has not only taken to the barricades on climate but has also embraced a wide range of sub-cultural trends about gender, sexual orientation and social justice with demands for more inclusive corporate governance. 

Consequently, ESG today means something to just about everyone — although not necessarily the same thing. What can be said with certainty is that public scrutiny of corporate behaviour has never been higher, and a critical mass of society today “vote with their feet” when making economic, financial, consumer, or political choices depending on their perception of levels of responsibility. With so much hanging in the balance, little wonder that business leaders across all sectors make their best efforts to tout their “ESG credentials”.

However, dark clouds are gathering over ESG. The singular focus on ESG has led to rampant greenwashing (environmental), blue-washing (social), and virtue signaling. In the fervor to squeeze in as much ESG as possible into just about anything, the concept has become so muddled, stretched-out and politicized that it is starting to lose its roots. ESG has become a red flag for those who rally against what they see as little more than corporate wokeness.

There are now more than 600 different ESG standards to pick from. Recent studies have shown that senior business leaders while supporting ESG, view it mainly as a brand reputation or staff retention exercise rather than a priority for long-term profitability or a reason to rethink governance. On Wall Street, the best-known secret is that many see it as a box-ticking exercise to be endured so that they can get on with the actual business. 

Complex problems require complex solutions. Business leaders increasingly have to confront such seemingly impossible balancing acts, defined in policy theory as “wicked problems” because of their immense complexity, which lacks a simple solution, and often end up being managed by organised irresponsibility.

To withstand the test of time, ESG has to evolve. There is now wide acknowledgment that it requires more nuanced and less binary perspectives; a growing recognition that ESG is less about what companies do, and more about how they do it. The idea that whole sectors of industry can be divided into “good ESG” and “bad ESG” has revealed the wafer-thin intellectual depth in parts of today’s debate. The transition to a more sustainable energy system is a good example: the nexus between economic development and access to energy presents an excruciatingly challenging balancing act of sustainability, security and cost. The reticence to confront that complexity is partly to blame for why it took 28 years until this year’s COP28 to corral world leaders around an agreement that explicitly states (though less forcefully than many had hoped) a need to move beyond hydrocarbons.

Complex problems require complex solutions. Business leaders increasingly have to confront such seemingly impossible balancing acts, defined in policy theory as “wicked problems” because of their immense complexity, which lacks a simple solution, and often end up being managed by organised irresponsibility. ESG today stands before its first existential crisis, but tomorrow’s ESG landscape is already taking shape. It will be different and better but also requires a more thoughtful response from investors and asset owners. 

Today’s over-crowded landscape of ESG standards is already distilling into fewer, but better, standards — and efforts are underway in many places to convert such standards into regulation. As future generations look back, it will seem mad that prior to the climate crisis, companies were left to develop and present environmental and social reporting arbitrarily. Mind you, it wasn’t until the great depression in 1929 that corporate financial reporting became subject to commonly agreed accounting standards either. While such an increasingly regulated ESG field may level the playing field and improve transparency, it will also shift focus from “innovation” to “compliance”. Compliance rarely equals leadership, so those who aspire to recognition as ESG leaders will need to also identify, quantify, and govern social and environmental impacts. You can’t manage what you cannot measure.

What makes this period so exciting is that leadership will depend less on having “deep pockets” or boundless resources, but more on having the right mindset and strategic and operational capability. One of the critical failure points in the past was that ESG was left to the ESG specialists: the ‘90s and early ‘00s saw an influx of Chief CSR Officers drawn from areas of environmental or social expertise with limited business experience. Consequently, they lacked a shared language with the rest of ExCo and the board and struggled to articulate value propositions that resonated with peers operating under heavy P&L pressures. To avoid repeating these pitfalls, ESG must not be treated as a night and weekend job for someone in the C-suite or bolted onto an existing function (i.e., M&A, Health & Safety, HR, Investor Relations, etc.) The challenge for many organizations will be to bring onboard and integrate ESG leaders with strategic and commercial acumen, the ability to anticipate complex political and societal developments and translate those into a vision with quantifiable commercial, operational and reputation outcomes that resonate with both internal and external stakeholders.

Meet the Authors

Jennifer Skylakos is the Head of DHR Global’s Sustainable Infrastructure & Energy Practice. She recruits for, and advises, private equity firms and their portfolio companies, and corporate clients; assessing, designing, and building out investment teams, C-suites and ESG leadership teams. Jennifer is a frequent speaker on sustainable investing and works with management teams and boutique investment banks to make strategic introductions to investors.

Rikard Scoufias has over 20 years of C-suite and board experience leading ventures with complex ESG challenges in Europe, Asia, the Americas, and Africa and has advised both government and industry. He chairs Greece’s national energy corporation and is a senior advisor to ERM. Previously he was CEO for the Trans Adriatic Pipeline and head of Corporate Affairs at BP Plc. His commentaries on strategy and how business can strengthen “political and social license” have been featured by the Davos Economic Forum, COP28, the Economist, and the Financial Times.

Curious for more insights? Dive into our exclusive interview with the author Rikard Scoufias for an in-depth exploration of the decarbonization journey and the transformative initiatives taken by the Greek government to turn a national oil and gas company into an energy resources company. Watch the video here to delve into the details behind the acclaimed ‘best in Europe’ programs and gain further insights into the energy landscape.

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