By Alex Friedman and Josh Green

About the authors: Alex Friedman and Josh Green are co-founders of Novata, a technology firm that helps companies measure and improve on their sustainability characteristics.

ESG is dead, so they say.

Investors seem to be yanking money from "sustainable" stock funds -- flows to those funds hit a record-low in the first quarter of this year. Regulators appear to be backtracking on plans to require companies to report on sustainability, with the Securities and Exchange Commission scrapping its proposed climate disclosure requirement and the European Union scaling back on its planned Corporate Sustainability Reporting Directive. And the Trump administration looks hellbent on driving a stake through the heart of the whole concept of sustainability, as underscored by its attacks on anything DEI or climate-related.

And yet, if the struggling sustainability movement could talk, we suspect it would borrow a famous quip from Mark Twain: "Reports of my death are greatly exaggerated."

Yes, first-quarter flows to public sustainability stock funds were down. But according to Morningstar, the global ESG fund universe ended the quarter at $3.16 trillion, up from just over $2 trillion a few years ago and up hundreds of billions of dollars from this time last year. And even though the SEC and the EU are pulling back on corporate sustainability disclosures, much of the rest of the world is doubling down on them. India, China, Malaysia, Singapore, the Philippines, Japan, Brazil, the United Arab Emirates, Qatar, Saudi Arabia, Mexico and the U.K. have implemented, or plan to implement, varying forms of mandatory sustainability reporting and compliance for companies in their jurisdictions. More than 20 nations, accounting for 55% of the global gross domestic product, have adopted or are taking steps to adopt the reporting tenets of the International Sustainability Standards Board in their regulatory approaches. Even in the U.S., a range of states have introduced legislation focused on corporate-level emissions reporting, facility-level emissions reporting, and net zero related targets.

A lot of the anti-ESG talk is just politics -- or at least political expediency. Consider a Texas-led lawsuit recently joined by the Federal Trade Commission and the Justice Department, which accuses a range of large asset managers of using ESG to manipulate coal markets. The suit claims BlackRock, State Street, and Vanguard invested in major coal producers to use their combined influence to pressure the companies to cut coal production to support the clean energy movement, in violation of the Sherman and Clayton Acts.

This makes for some good headlines for the Trump administration. But the reality is those asset managers invest in this sector through passive index funds, which don't make active management decisions and just provide investors exposure to predetermined segments of the market. And the substance of the lawsuit assumes coal companies conspired with their shareholders to reduce coal production -- a stretch at best, but decent politics for this fraught moment.

If we step back from the clamor of today's culture wars, the huge volume of assets under management make clear that investing with sustainability considerations in mind isn't over. It remains a material part of the world's equity markets. And counter to common perception, most governments and regulators are accelerating their commitment to these issues.

There is a good reason for this.

The notion that each company faces financially material risks linked to how it approaches matters of governance, energy management, and supply chains -- in other words, how it considers ESG issues -- is obvious to anyone outside of the political bubble and inside the business world. Every investor who has ever built a model or read a financial statement or analyzed a Management Discussion and Analysis disclosure knows that issues stemming from cyber breaches, employee attrition, worker safety and energy supply are critical to a company's success. These are basic risk factors for any enterprise. Yet, in recent years they have been commonly lumped into the ESG category -- an unfortunate acronym that forces together disparate concepts, clouding their obvious importance.

So let's forget the term ESG. Focus on the risks inherent in each letter of the acronym. This is what many investors are now doing: Over the past year, more than 600 ESG funds in Europe alone changed their name to "screened" or "transition" or "committed" or "thoughtful" or "enhanced." The funds' names have changed, but not their investing activities. They are still screening for unacceptable risks, still managing money with the same analytical strategies, and still successfully raising new money.

What is also changing is that measuring risks as an end to itself is giving way to explaining how such risks affect financial materiality and business resilience. We're seeing a needed separation of risks within the E, S, and G; a culling of the wide swath of what is measured, and a refocus on what is actually affecting financial value.

Before the stock market crash of 1929, about 10% of Americans invested in the stock market. Now more than 60% of Americans do. That is because risk management of the markets evolved, with increasingly effective financial regulation through institutions like the SEC, consistently improving disclosure regimes and investor protections, and the introduction and refinement of standardized financial reporting.

Financial reporting continually evolves not just because it is under constant pressure as a technology, but also because human endeavors change over time. And just as in nature, such evolutionary pressures produce something stronger.

ESG investing is also evolving. It may be a dead as a term, but it is very much alive as a concept. It is becoming less performative, and more grounded in value creation. That is a good thing, for supporters and critics alike.

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June 04, 2025 03:30 ET (07:30 GMT)

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