Does ESG Actually Matter? A McKInsey Report Says So!

Since the acronym "ESG" was coined in 2005, and until recently, its fortunes were steadily growing. To take one example, there has been a fivefold growth in internet searches for ESG since 2019, even as searches for "CSR"-an earlier area of focus more reflective of corporate engagement than changes to a core business model-have declined. Across industries, geographies, and company sizes, organizations have been allocating more resources toward improving ESG.

More than 90 percent of S&P 500 companies now publish ESG reports in some form, as do approximately 70 percent of Russell 1000 companies. In a number of jurisdictions, reporting ESG elements is either mandatory or under active consideration. Additional SEC regulations on other facets of ESG have also been proposed or are pending. The rising profile of ESG has also been plainly evident in investments, even while the rate of new investments has recently been falling. A major part of ESG growth has been driven by the environmental component of ESG and responses to climate change. In the wake of the war in Ukraine and the ensuing human tragedy, as well as the cumulative geopolitical, economic, and societal effects, critics have argued that the importance of ESG has peaked.

Attention, they contend, will shift increasingly to the more foundational elements of a Maslow-type hierarchy of public- and private-sector needs, 8 and in the future, today's preoccupation with ESG may be remembered as merely a fad and go the way of similar acronyms that have been used in the past. Others have argued that ESG represents an odd and unstable combination of elements and that attention should be only focused on environmental sustainability. In parallel, challenges to the integrity of ESG investing have been multiplying. In other words: Does ESG really matter to companies? What is the business-grounded, strategic rationale?