What Does the ESG Backlash Mean for Human Rights?

The use of environmental, social, and governance (ESG) factors in driving investment decisionmaking has grown exponentially in the last five years, with investments into ESG funds more than doubling between 2019 and 2020 alone. Pricewaterhouse Coopers estimates that U.S. assets under management that include ESG considerations will rise from $4.5 trillion to $10.5 trillion between 2021 and 2026. Bloomberg Intelligence reported that global ESG investments exceeded $40 trillion in 2022 and predicted they will reach over $50 trillion by 2025. By one estimate, 61 percent of North American investors applied ESG criteria to at least part of their portfolio in 2022.

This rapid expansion is driven by an increasingly widespread view among investors that company policies related to environmental and social impacts and corporate governance materially influence the long-term value of potential investments. In an Edelman Trust Barometer survey of 700 global investors, 90 percent agreed with the statement that “companies that prioritize ESG integration represent better opportunities for long-term returns than those who do not.” Institutional investors, insurance companies, and banks have all argued strongly for the inclusion of environmental and social impacts in their financial decisionmaking. The track record of such decisions explains why: multiple studies have found that companies that address ESG issues (particularly those most salient to their business) outperform those that do not.

Corporate performance on human rights is a central component of the “S” in ESG, though one often overlooked by both those in favor and those opposed to ESG investing. While the diversity, equity, and inclusion (DEI) component of the social indicator has been the focus of much of the debate on ESG, other human rights issues, including worker health and safety, forced and child labor, displacement of communities, and attacks on human rights activists are all areas where investor influence has been critical in changing corporate behavior. This impact could be significantly diminished if anti-ESG efforts continue to gain momentum.

How ESG Drives Change on Human Rights

Compelling research has demonstrated that investors are the most significant driver of changes in corporate behavior with respect to ESG issues. Using ESG factors to assess investment opportunities is not new, and concerns about companies’ human rights impacts have been at the center of such considerations from the start. Pension funds serving religious institutions, for example, have long eschewed investment in companies selling weapons, alcohol, or gambling. In the 1980s, social movements drove divestment from companies continuing to work in apartheid South Africa. With the rise of “socially responsible” investment firms in the 1990s, more individual investors gained access to funds that screened out companies or industries with problematic social or environmental records.

While much of the backlash against ESG investing has been focused on domestic U.S. issues, the majority of the social impacts considered by ESG investors take place overseas. These include an investment’s potential impact on a range of human rights issues, from child and forced labor, to contamination of water sources, to the protections companies put in place to guard against bribery and corruption. Investors have been at the forefront of efforts to encourage companies to carry out due diligence to identify human rights risks in their operations and supply chains and take steps to prevent, mitigate, and remedy any potential abuses. They have also pushed companies to respond to specific human rights abuses and imposed consequences for failures to do so. In 2021, for example, Black Rock voted against the reelection of corporate directors of Top Glove, the world’s largest rubber glove manufacturer, after U.S. Customs and Border Protection and Malaysian authorities found credible evidence of forced labor and insufficient Covid-19 protections in Top Glove factories. Investor pressure also led companies to divest from junta-controlled assets in Myanmar and was one of the most important drivers behind the landmark Accord on Fire and Building Safety in Bangladesh, which put in place landmark safety standards following the collapse of the Rana Plaza garment factory, which had resulted in the deaths of more than one thousand apparel workers.

Investors engage in these efforts not for altruistic reasons, but because human rights risks often become investment risks. Allegations of worker mistreatment, sexual harassment, pollution, and other impacts have a material impact on stock prices, as well as create reputational risks that undermine consumer confidence and make it more difficult for companies to recruit employees (particularly millennials and Gen Zers). Such impacts can reach the highest levels of the corporate ladder as well as the company’s bottom line. Both the CEO and chairman of Rio Tinto were recently forced to step down after the company destroyed an ancient Aboriginal site in Western Australia as part of an iron ore exploration project. Fast fashion giant Boohoo lost 18 percent of its stock value—more than 500 million pounds—when news broke about abusive working conditions in their UK factories.

Investors engage in these efforts not for altruistic reasons, but because human rights risks often become investment risks.

As a result, as companies increasingly recognize the reputational and financial risks of adverse human rights impacts, corporate human rights commitments and due diligence practices have become more prevalent. The percentage of North American companies with human rights commitments grew from 56 percent in 2017 to 85 percent in 2020, and nearly half of U.S. companies now publish human rights disclosures related to their supply chains.

The Impact of the Backlash

As ESG investing has expanded, however, it has been met with pushback in the United States at both the state and federal level. In 2023, at least 165 anti-ESG bills have been introduced across 37 U.S. states, many seeking to prohibit state agencies from doing business with firms that screen out industries they seek to protect—such as fossil fuels in Texas—or mandating that asset managers for state funds de-prioritize ESG criteria in making investment decisions. At the federal level, legislators are focused on the mechanics of how ESG-related decisions are made, including the role of proxy advisors, shareholder resolutions, and asset management firms. In the House, more than half a dozen anti-ESG hearings have been held since May, concluding with party-line votes on four related pieces of legislation.

Much of the backlash has been focused on the “E” in ESG, and in particular the incorporation of climate change considerations into investment decisions—though some social issues, especially company efforts to address anti-LGBTQ+ and specifically anti-transgender bias, have come under attack. The term “ESG” has also been increasingly applied to company initiatives that have nothing to do with investors (such as Bud Light’s partnership with social media influencer Dylan Mulvaney)—so much so that Blackrock CEO Larry Fink has declared the term to be too politicized to continue to use.

And while the controversy over ESG investing is having a relatively minor influence on investor behavior, with fewer investments in U.S. ESG funds than in previous years (and a slightly larger impact on investor messaging), the ESG backlash does have consequences. Monitoring and reporting on the social components of ESG has long been a challenge to standardize, and the many competing initiatives for investors to measure companies’ social performance are imperfect at best. Rather than dedicating time to improving and consolidating these mechanisms, supporters of ESG investing have had to shift their focus to defend an imperfect system. Companies that once touted their environmental and social initiatives have shifted their messaging, and while they have not necessarily changed their behavior (yet), they are not advertising these efforts. The spillover effect of sending corporate work on human rights underground could result in fewer companies feeling pressure to undertake such initiatives—including in areas where political leaders on both sides of the aisle in the United States agree, such as encouraging U.S. companies to pull out of Russia or to more effectively tackle forced labor in their global supply chains.

What’s Next for ESG Investing

Despite these developments in the United States, global developments continue to move firmly in the other direction for now. Voluntary initiatives promoting ESG as a component of responsible business conduct retain strong membership; the UN Principles for Responsible Investment (PRI), for example, has grown from 63 signatories when it launched in 2006 to more than 5,300 today, representing more than $120 trillion in assets. PRI signatories agree to incorporate ESG principles into their investment analysis and ownership policies, to seek greater disclosure of ESG indicators, and to promote the PRI principles within the investment industry.

Both employees and consumers are increasingly demanding that companies take environmental and social impacts into consideration in making business decisions. In a recent survey across 27 countries, 6.5 times as many respondents felt companies were not doing enough to address climate change and economic inequality as those who felt companies were overstepping. Meanwhile more than 3,000 U.S. companies operating in Europe are now subject to the European Union’s Corporate Sustainability Reporting Directive, which entered into force in January 2023 and mandates that companies disclose environmental and social risks and opportunities. In the coming months, the European Union is also expected to adopt a Human Rights and Environmental Due Diligence Directive, which will require companies doing business in Europe to assess human rights and environmental risks in their supply chains, and will similarly apply to large U.S. companies doing business in Europe. (One of the four bills adopted by the House Financial Services Committee would mandate the SEC to further assess the potential impacts of these directives on U.S. companies.) As a result of these and other initiatives, and despite the pushback in the United States, strong stakeholder demand for companies to engage on environmental and social issues and expanding global legislation in support of sustainable investing mean ESG considerations are likely to remain part of both investors’ and companies’ long-term strategies.

Marti Flacks is the Khosravi Chair in Principled Internationalism and director of the Human Rights Initiative at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Hannah Norman is an intern with the CSIS Human Rights Initiative.

Marti Flacks

​Marti Flacks

Former Khosravi Chair in Principled Internationalism and Former Director, Human Rights Initiative

Hannah Norman

Intern, Human Rights Initiative