In the 15 years that Milla Craig has been measuring corporate Canada’s sentiment on environmental, social and governance principles, she’s seen companies and investors gradually embrace them, bringing them into the business mainstream. 

But in one of her company’s latest surveys, Craig, the president and CEO of advisory firm Millani, noticed a shift in tone on the topic. More investors in Canada are steering clear of the term “ESG.”

The new aversion to the acronym, she said, is a reaction to the backlash in the U.S. that’s triggered outflows of capital from fund managers and investments identified with ESG. 

“There have been a lot of investors who, over the last year, they got scared by this,” said Craig.

The Logic’s interviews with sustainable finance experts in recent months reflect Craig’s observations: there’s a growing disdain for the term—even among professionals whose titles include it. 

In the past few years, throngs of investors, companies and lenders have made bold environmental and social commitments, from reducing carbon emissions to improving board diversity to protecting human rights along supply chains. 

The philosophy behind the movement broadly known as ESG is that doing good for society is also good business, in the long term if not the short. Many of the world’s biggest companies and investors have bought into the idea, signing pledges and joining alliances intended to hold them to their promises. 

But in 2021, as ESG-labeled assets peaked, the discussion around sustainable business and investing shifted. Republican states, starting with Texas, sought to block certain sustainable investing practices. From January to June of 2023, the U.S. saw at least 165 bills and resolutions in 37 states against ESG investment criteria. “Anti-woke” entrepreneur Vivek Ramaswamy’s dark-horse bid for the Republican presidential nomination has helped push the backlash into the headlines. And in the 5,100-word “techno-optimist” manifesto he published this month, Marc Andreessen, the influential general partner at Silicon Valley venture capital firm a16z, called ESG an “enemy” that is “against technology and against life.” 

The political pressure has had an impact. Last October, a group of U.S. states pulled about US$1 billion from BlackRock, the world’s largest fund manager, over concerns it placed too much emphasis on ESG. In the latest edition of his widely read annual letter to shareholders, BlackRock chairman Larry Fink—a longtime ESG booster—refrained from using the term.

Other investors and asset managers, including Pennsylvania-based Vanguard, have walked back net-zero commitments, with some citing legal concerns around fiduciary duty. And the U.S. Securities and Exchange Commission has dropped ESG from its list of compliance priorities for firms in 2024. 

The value of sustainable assets in the U.S. declined about 20 per cent in 2022, according to a Morningstar report. This year, the market has seen four straight quarters of outflows in the category. 

The backlash hasn’t hit Canada in the same way. ESG activity in the country has held relatively steady, according to the Responsible Investment Association, a Canadian industry organization that promotes sustainable finance. RIA’s latest investor survey found that investments categorized as “responsible” accounted for about $2.9 trillion in assets under management, compared to $3 trillion a year earlier.

While Canadian investors may not be pulling big dollars out of ESG, Craig said they are re-evaluating their choice of words. 

“This pushback in the U.S. has created an internal review by every asset manager,” she said, “because none of them wants to be called out the way Blackrock was being called out.” 

Some experts who spoke to The Logic said they objected to the term “ESG” because it is imprecise. 

Laura Zizzo, co-founder and CEO of Manifest Climate, is among them. “We don’t do ESG,” said Zizzo, whose software platform helps firms assess business risks associated with climate change. “It’s just putting everything into a bucket that is too murky to be helpful.”

Alex Todorovic, founder and CEO of Arbor, a platform that helps firms reduce their carbon footprint, has a similar view. “Personally, I hate the term ESG,” he said onstage at a sustainable finance conference in Toronto last month. “It’s doing more harm than good because it’s lumping so many factors together,” he said. “It’s reducing the focus required for us to be able to get the job done,” which for Arbor, Todorovic said, is curbing greenhouse gas emissions.  

Adelaide Chiu, head of responsible investing at NEI Investments, also takes issue with the term, but for a different reason. While environmental, social and governance factors are often inextricably linked, she said, ESG departments tend to evaluate them separately. For example, companies often look at human rights as a social issue, but Chiu points out that it’s also a governance issue. “How are you governing the management of human capital?” she said. Climate change—considered an “environmental” concern—can also have human rights implications, with catastrophic weather disproportionately harming people in developing countries.

“To me it’s hard to bucket the factors into one category, which is why I tend not to use it,” Chiu said of the term. 

Craig at Millani said there’s confusion about how “ESG” differs from “sustainable finance” or “socially responsible investing.” 

When the United Nations introduced the term in the early 2000s, ESG was specifically meant to help investors measure risks that non-financial factors had on their returns. SRI, meanwhile, refers to a practice of investing in companies primarily for their positive social and environmental impacts. Both fall under the sustainable finance umbrella. 

Over the years, ESG evolved into a catch-all term synonymous with responsible or sustainable business practices. 

“I don’t think that the market quite has the sense of the difference here,” said Craig. 

Industry associations are now trying to clear up the confusion. Last fall, three global sustainable finance organizations launched the Collaboration to Align and Refine ESG Terminology (CARET). The initiative aims to clearly define ESG and other sustainable finance approaches and offer guidelines for how to use the terminology. The process is meant to wrap up this year. 

Craig said the new hesitation around the term is ultimately a good sign. It suggests the ESG backlash in the U.S. is sparking more scrutiny in an industry that is rife with empty promises and greenwashing. “You never waste a crisis,” she said. “At the end of the day, this pushback has caused the industry to have to up its game.”