Goodbye ESG, Hello Big And Small Sustainability

Goodbye ESG, Hello Big And Small Sustainability

Twenty years ago, the idea of integrating environmental, social and governance issues into fund research and equity analysis was launched in a United Nations paper, ‘Who Cares Wins: Connecting Financial Markets to a Changing World.’ Back then, this was seen as a new phase in the rise of socially responsible investing. ESG fund inflows boomed in the period 2018-21. Why? Asset managers like BlackRock marketed new offerings; the EU’s Sustainable Finance Disclosure Regulation (SFDR) prompted European fund managers to create sustainable fund portfolios; and retail investors bought into the ethics and the returns. 

According to Morningstar’s analysis of global sustainable fund flows, however, the US has only experienced outflows since Q2 2022. Janus Henderson Group and State Street, amongst others, began liquidating ESG mutual funds in 2023. Even in Europe, fund inflows have been limited to a $5 billion to $18 billion range for the last six quarters. Widespread attacks on ‘woke capitalism’ in the US started in 2021.

With the return of President Trump to the White House, financial institutions are undertaking a root and branch review of their ESG investment strategies. Since December 2024, Bank of America, Citigroup and Morgan Stanley have exited the Net-Zero Banking Alliance. In the US, the rollback of ESG activities has spread from the capital markets into the real economy. Since January 2025, firms such as Google, Meta and Target have either eliminated their diversity, equity and inclusion (DEI) policies or nixed certain DEI goals. There will be no mandatory federal climate or ESG reporting rules in the US until 2030 at the earliest. In Europe, despite the publication of the first wave of Corporate Sustainability Reporting Directive (CSRD) reports by companies such as Philips, Sanofi and Unilever, the European Commission has launched a – Kafkaesque – process to simplify the myriad sustainability reporting requirements it has itself created over the last three years. Weak enforcement, delays to future reporting and reduced applicability to small businesses are likely outcomes. 

Where does this leave firms with ESG software products or ESG consulting services? In the US, they need to apply a political filter to their positioning. Firms selling into multiple ‘red’ states or to the federal government should immediately retire the ESG tag from marketing material. The acronym is now officially toxic. Verdantix survey data, meanwhile, indicate that European business leaders have never been positive about the term ‘ESG’. It is regarded as a US import referring to the financial risks and opportunities for a firm that relate to ESG factors, and therefore excludes external impacts. It does not include the idea of double materiality, which lies at the heart of the CSRD. Eliminating ESG from software, data and services propositions in the European market might therefore be seen as a positive – because it is incomplete.

How will this play out? Beyond everything ESG being rebranded as ‘sustainable business’ or ‘sustainability’, will market dynamics shift? In the US, firms will invest in sustainability initiatives that align with a financial risks and opportunities framework. Environmental risks such as wildfires, hurricanes and chronic drought are real-world problems that are unaffected by acronyms. Fortune 500 firms won’t defund worker health and safety programmes. Supply chain resilience will continue to require attention – especially in an era of tariffs. But without a regulatory forcing factor, US-headquartered firms won’t centralize governance of sustainability issues. Risk assessment and opportunity identification will mostly be fragmented across functions. The level of ambition will rarely go beyond stakeholder engagement: small sustainability. By contrast, Europe-headquartered firms will move towards more centralized governance, as the post-Omnibus regulatory framework becomes clearer. Firms with more than €5 billion in revenue will start or continue their transformation strategies: big sustainability. Solution providers will therefore need to adapt their go-to-market plans to meet the needs of very different buying concepts on the two sides of the Atlantic.