Without a doubt, ESG has become a popular investment strategy because of its promise of contributing significantly to companies’ bottom lines.
Environmental, Social, and Governance (ESG) is a framework that investors, analysts, and other stakeholders use to assess a company’s overall sustainability and ethical practices. It involves criteria such as human rights, climate change, and board independence, to name a few.
The term has been thrown around in business circles for several years now. You may have heard of other similar acronyms such as GRI, IFRS, ESRS, CSRS, CDP, ISSB, SBTi, UN SDGs, and TCFD. All of these are connected with ESG. Consequently, the influx of these initiatives and regulations is the reason why there is also a growing share of Philippine publicly listed companies that are releasing sustainability disclosures.
Without a doubt, ESG has become a popular investment strategy because of its promise of contributing significantly to companies’ bottom lines. In Q4 2024 alone, global sustainable funds recorded inflows of over USD 16 billion. However, the investment framework has recently found itself at a crossroads, particularly in North America and Europe.
In the U.S., ESG has been heavily criticized by many from the political right, arguing that it prioritizes contentious social and political agendas over financial returns. Under the Trump administration, for example, several Diversity, Equity, and Inclusion (DEI) initiatives have already been scrapped in the federal government. In line with this, federal agencies have been instructed to deter DEI initiatives in the American private sector. This could have serious repercussions, given that DEI was meant to address discrimination and harassment in the workplace.
In Europe, ESG has largely been supported by the business community. Recently, however, the German Chancellor has called on its European counterparts to cancel the European Union’s (EU) Corporate Sustainability Due Diligence Directive (CSDDD), citing that the law could erode the region’s competitiveness. EU member states are supposed to transpose the CSDDD into their respective national legislations. However, the statement of the German Chancellor could be a sign that the European business community’s sentiment towards ESG is changing.
It suffices to say that there seems to be a growing dissatisfaction towards ESG, with critics arguing that the investment framework is doing more harm than good on financial bottom lines. But was ESG intentionally designed to cause this imbalance, or are critics simply being impatient with the results that ESG promises? ESG, after all, involves a long-term investment horizon since it addresses multiple interests at once.
Several studies support the argument that ESG investments can, in fact, lead to increased firm value and profitability. In one study, the “S” and the “G” were found to have a significant relationship with firm value, whereas the “E” does not. Despite this, the combined scores of the E, S, and G have a positive and significant relationship with firm profitability, suggesting that investments in high ESG performance can help contribute to firm value and profitability. The study was based on 1,720 publicly listed companies selected from the Bloomberg database.
Another benefit of ESG is in terms of improved operational efficiency. When companies implement ESG, this usually involves initiatives on resource efficiency, waste reduction, and improved operational practices, among others, thereby contributing towards cost savings and increased productivity. For instance, energy-efficient practices via the use of renewable energy sources can help lower an organization’s energy bills, given that energy sources such as solar and wind power can be easily replenished.
One major downside of ESG investment and implementation, however, is that they take a very long time to materialize. In a business culture that prioritizes quick financial gains over long-term sustainable growth, this is one main reason why critics are highly against ESG.
What about in Asia? ESG is at its early stages in Asia, but it is nonetheless picking up some steam. For instance, the Asia Pacific sustainable bond market is projected to reach USD 260 billion in 2025, with ESG funds growing two times faster than in other regions. In addition, approximately 30% of Asia’s largest corporations now track their ESG performance. The Philippines itself already has several ESG-related regulations in place, thereby setting the foundation for its future sustainable growth.
Where does ESG go from here? It is hard to tell, given ever-changing politics in both the public and private sectors. We can only watch as our global leaders move the delicate chess pieces of this increasingly contentious issue, ultimately affecting how we do business locally.
Ian Benedict R. Mia is a part-time lecturer at the Department of Management and Organization of De La Salle University (DLSU). He works full-time as a Corporate ESG Researcher at one of the top ESG Ratings firms globally. He can be reached at ianbrmia@gmail.com.
The views expressed above are the author’s and do not necessarily reflect the official position of DLSU, its faculty, and its administrators.
