Understanding ESG: getting out of the ideological noise, going back to basics: risk management
Woke in the United States, weakened in Europe, misunderstood by companies: the term ESG seems today full of everything except its initial meaning. And yet, his heart never changed. This text offers a return to basics, far from caricatures, to understand what ESG really is, why double materiality has confused the message, and how the analysis of extra-financial risks remains essential to any business strategy.
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In recent years, ESG has become an ideological battleground and the perfect scapegoat for global uncertainty.
In the United States, some describe it as “woke”, others as purely diabolical. In Europe, the Commission is hesitant to defend a principle that is nevertheless central to the Green Deal. And in companies, many managers no longer know very well what is expected of them, caught between the Greenwashing And the Greenhushing.
A visible consequence is the rapid disappearance of this term in the communication space, as recounted in this Article of Echoes. However, it is a sterile controversy.
Let's go back to the basics for a moment, as simply as possible.
ESG at the Source: a simple risk analysis
When ESG appeared in the early 2000s, it was neither an activist instrument nor a fad for NGOs. It is a financial risk analysis method for investors:
- Risks E (Environmental): climatic, regulatory, transition, resource dependence.
- Risks S (Social): rotations, social conflicts, security, reputation.
- G risks (Governance): fraud, corruption, composition of the board of directors.
ESG was born in finance, through finance, to improve the evaluation of non-accounting fundamentals and identify what could destroy value. If you don't analyze it, you're managing your portfolio poorly. The proof is in.
Double Materiality: a logical conflict
Europe then introduced the double materiality via CSRD: a powerful concept, but a major source of confusion.
Logic 1: Financial materiality
⟶ What impacts the business (the risk Inward).
Logic 2: Impact Materiality⟶ What the company impacts(the effectOutward).
This concept, by trying to combine these two distinct logics (risk and societal impact), was a boon for detractors: it created profound misunderstandings, unrealistic expectations and allowed amalgam.
Climate, politics, diversity, personal beliefs: everything was thrown together. ESG has become a cultural and political symbol, and no longer the rigorous tool that it was.
ESG in the United States: a scarecrow
The American debate around ESG no longer has anything to do with risk management, which has been its historic core.
The changeover occurs when some funds apply sectoral exclusions (fossil fuels, armaments), which are common practices in Europe, but explosives in states whose economies are based on these industries (Texas, Oklahoma, Wyoming).
Starting in 2021, the word “ESG” becomes a Ideological marker : “ESG is woke capitalism” campaigns, investigations against BlackRock, blacklists.
The Counter-Foot of the Real
However, this radical politicization quickly turns against its authors: several studies show that the exclusion of large banks from recalcitrant states increases their borrowing costs since the risk is poorly assessed. The reality of the cost of capital is stubborn.
Meanwhile, the SEC is adopting climate reporting... exclusively based on financial materiality, that is to say the historic heart of ESG.
The paradox is complete: the word “ESG” is becoming toxic, but ESG analysis practices continue, simply under other names (climate risk, resilience, non-financial material factors). The conflict is essentially semantic, not technical.
European hesitation: a strategic narrative error
In Europe, the debate is not ideological, but bureaucratic and administrative.
The European Commission has weakened its own story. She backed down on her ambition, oversimplified (VSME without DMA) and let the idea that ESG would be an unbearable burden take hold, without recalling quite clearly that the Green Deal aimed to protect our economy systemic risks and to make the EU a leader in a new skill: sustainability (subject of a future article).
This founding message (integrating risks at the same level as financial risks) was not carried out sufficiently or early enough. China has jumped into the breach.
The Supreme Irony: China Adopts the DMA
Ironically: Even though Europe is removing the logic of double materiality from the VSME framework for SMEs, China is introducing a DMA mandatory in several pilot areas, which reinforces the analysis of extra-financial risks.
The signal sent to the rest of the world is striking: while Europe has doubts, its strategic competitors are moving forward with the integration of risks.
The VSME Framework: a useful but incomplete framework
VSME is simple, useful and proportionate for SMEs. It is definitely a step forward. But without a materiality dynamic (DMA), it does not allow SMEs to:
- Prioritize their risks in a strategic way.
- Communicate effectively with banks and insurers (who want to know what is hardware to theirs decision).
Hence the need for additional standards such as VSME+, better adapted to the real uses of territories, sectors and funders. Sustainability must be To pilot, not just postpone.
Get back to basics
If we remove the noise, the controversies and the ideological excesses, there is still a simple and financial truth:
👉 ESG is, and will remain, an absolutely essential risk analysis.
Indispensable for all organizations operating in an uncertain world. Climate change does not wait for the end of political controversies.
The subject is not “ESG or not ESG.”
The subject is: how to intelligently integrate the risks that matter (climate, social and regulatory risks) to make better decisions, strengthen business resilience and better secure capital. Free of its semantic and political burden, the ESG approach is once again becoming what it should have always been: a essential governance tool and a condition of long term performance.