1. Introduction
In recent years, the environment surrounding environmental, social, and governance (ESG) investment has changed dramatically. The U.S. Trump administration’s withdrawal from the Paris Agreement and anti-ESG policies have gone against the trend of the international community. On the other hand, a recent analysis by MSCI (Morgan Stanley Capital International) (Note 1) found that companies with thriving environmental and social commitments outperform others. This is consistent with an earlier finding that ESG-related disclosures and initiatives positively correlate with profit and corporate value (Tobin’s Q) (Note 2) (Yoo and Managi 2022). What will happen to the environment surrounding ESG investment in the future?
2. Anti-ESG trends and their impact
First, I would like to summarize the current anti-ESG trends. On the day of his inauguration, U.S. President Donald Trump signed an executive order to withdraw the United States from the Paris Agreement and set out a policy to enhance support for the fossil fuel industry. In response, all six major U.S. financial institutions, including Goldman Sachs and JPMorgan Chase, withdrew from the Net Zero Banking Alliance (NZBA), an international banking alliance that aims to reduce greenhouse gas (GHG) emissions to effectively zero, indicating a growing trend away from ESG investment.
This can be viewed as a reaction to radical actions by environmental activists to date. For example, the East African Crude Oil Pipeline (EACOP) initiative has come under heavy fire from environmental activists, forcing many financial institutions to end their engagement with the initiative. One such institution is Mitsui Sumitomo Financial Group, which was requested by environmental activists in June 2022 to cease its involvement in the project (Note 3). On March 6, 2024, the Japanese financial institution withdrew from the Equator Principles (which urge financial institutions to give due consideration to the impact of large-scale development projects on the natural environment and local communities when financing them). Additionally, it announced its withdrawal from the NZBA international decarbonization framework on March 4, 2025.
Given the above, the current situation surrounding ESG investment is more of a financial normalization, with companies focusing on issues that they are naturally compelled to focus on. The argument of anti-ESG activists is that companies should end ESG activities that are not related to their business and should focus on initiatives related to social issues that will lead to improving their reputation (projects, consultations, or appropriate ESG activities that can lead to future growth). Companies that have been accused of “ESG-washing” (the act of pretending to take actions or exaggerating ESG considerations) are also likely to refrain from joining ESG funds in the future. ESG regulation development in Europe is also waning and becoming more realistic. As a result, companies will allocate resources to realistic social issues that are less punitive, rather than suddenly increasing management costs at enormous expense to the company.
3. Direction that companies should aim for in the future
Given the current economic insecurity and inflation around the world, as well as the global impact of artificial intelligence (AI), we are not in an era where we can afford everything. Therefore, in this era we are required to respond to large-scale social changes. In this context, ESG investment may at first seem to have diminished, but in reality, overly speculative and extreme activities are likely to be abandoned while returning to a more ideal state.
As a result, corporate behavior will shift toward a more appropriate trend of simplified ESG evaluation through the use of AI and other technologies. For example, the simplification of the Corporate Sustainability Reporting Directive (CSRD), which took effect in January 2023, requiring companies in the European Union to disclose sustainability information, can be evaluated as a realistic change in the context of the current major transformation. Within this trend, more realistic ESG measures should be required to be taken without needlessly increasing costs. In this sense, the simplification should be regarded as representing a systemic issue of how to utilize AI and other technologies to implement efficient and appropriate responses.
The focus should shift from concern about an ESG slump to the essential challenge of how to use AI and other technologies to realistically address and solve social issues and contribute to society. Rather than speculatively being swayed by the term “ESG” or unilaterally criticizing the oil industry, it is essential to develop a system that solves problems, contributes to society, contributing to ESG. For example, AI systems have been developed which can evaluate human rights risks around the world on a five-point scale and in real-time based on global news (Note 4) and which can identify hot spots of financial and non-financial risks in each industry in each country by tracing global supply chains of products to their endpoints. Companies that use these technologies to efficiently manage risks and effectively contribute to solving social issues are expected to survive in the future (Managi, 2021).
March 7, 2025
>> Original text in Japanese
