August 2022

Does ESG really matter—

and why?
Although valid questions have been raised about
ESG, the need for companies to understand and
address their externalities is likely to become
essential to maintaining their social license.

by Lucy Pérez, Vivian Hunt, Hamid Samandari, Robin Nuttall, and Krysta Biniek

Since the acronym “ESG” (environmental, social, and governance) 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”
(corporate social responsibility)—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.1 In
a number of jurisdictions, reporting ESG elements is either mandatory or under active
consideration. In the United States, the Securities and Exchange Commission (SEC) is
considering new rules that would require more detailed disclosure of climate-related risks
and greenhouse-gas (GHG) emissions.2 Additional SEC regulations on other facets of
ESG have also been proposed or are pending.3

The rising profile of ESG has also been also plainly evident in investments, even while
the rate of new investments has recently been falling. Inflows into sustainable funds,
for example, rose from $5 billion in 2018 to more than $50 billion in 2020—and then to
nearly $70 billion in 2021; these funds gained $87 billion of net new money in the first
quarter of 2022, followed by $33 billion in the second quarter.4 Midway through 2022,

1
Sustainability reporting in focus, G&A Institute, 2021.
2
 elease Nos. 33-11042, 34-94478, File No. S7-10-22, US Securities and Exchange Commission (SEC), March 21, 2022. The
R
proposed rule would not come into effect until fiscal year 2023 and could face legal challenges; “We are not the Securities and
Environment Commission—At least not yet,” statement of Commissioner Hester M. Peirce, SEC, March 21, 2022; Dan Papscun,
“SEC’s climate proposal tees up test of ‘material’ info standard,” Bloomberg Law, March 23, 2022.
3
 ee “SEC response to climate and ESG risks and opportunities,” SEC, modified April 11, 2022; “SEC proposes to enhance
S
disclosures by certain investment advisers and investment companies about ESG investment practices,” SEC press release, May
25, 2022.
4
“ Global Sustainable Fund Flows: Q2 2022 in Review,” Morningstar Manager Research, July 28, 2022; Cathy Curtis, “Op-ed: While
green investments are underperforming, investors need to remain patient,” CNBC, March 28, 2022.
 global sustainable assets are about $2.5 trillion. This represents a 13.3 percent fall from
the end of Q1 2022 but is less than the 14.6 percent decline over the same period for the
broader market.5

A major part of ESG growth has been driven by the environmental component of ESG
and responses to climate change. But other components of ESG, in particular the social
dimension, have also been gaining prominence. One analysis found that social-related
shareholder proposals rose 37 percent in the 2021 proxy season compared with the
previous year.6

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.7 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.9 Others have
argued that ESG represents an odd and unstable combination of elements and that
attention should be only focused on environmental sustainability.10 In parallel, challenges
to the integrity of ESG investing have been multiplying. While some of these arguments
have also been directed to policy makers, analysts, and investment funds, the analysis
presented in this article (and in the accompanying McKinsey piece, “How to make ESG
real,” August 2022) is focused at the level of the individual company. In other words: Does
ESG really matter to companies? What is the business-grounded, strategic rationale?

A critical lens on ESG

Criticisms of ESG are not new. As ESG has gone mainstream and gained support and
traction, it has consistently encountered doubt and criticism as well. The main objections
fall into four main categories.

1. ESG is not desirable, because it is a distraction

Perhaps the most prominent objection to ESG has been that it gets in the way of what critics
see as the substance of what businesses are supposed to do: “make as much money as
possible while conforming to the basic rules of the society,” as Milton Friedman phrased
it more than a half-century ago.”11 Viewed in this perspective, ESG can be presented as
something of a sideshow—a public-relations move, or even a means to cash in on the higher

5
“Global Sustainable Fund Flows,” 2022.
6
Richard Vanderford, “Shareholder voices poised to grow louder with SEC’s help,” Wall Street Journal, February 11, 2022.
7
 imon Jessop and Patturaja Murugaboopathy, “Demand for sustainable funds wanes as Ukraine war puts focus on oil and gas,”
S
Reuters, March 17, 2022; Peggy Hollinger, “Ukraine war prompts investor rethink of ESG and the defence sector,” Financial Times,
March 9, 2022.
8
 érengère Sim, “Ukraine war ‘bankrupts’ ESG case, says BlackRock’s former sustainable investing boss,” Financial News, March
B
14, 2022.
9
Charles Gasparino, “Russian invasion sheds light on hypocrisy of Gary Gensler, woke investment,” New York Post, March 5, 2022;
James Mackintosh, “Why the sustainable investment craze is flawed,” Wall Street Journal, January 23, 2022; David L. Bahnsen,
“Praying that ESG goes MIA,” National Review, March 17, 2022.
10
See, for example, “ESG should be boiled down to one simple measure: emissions,” Economist, July 21, 2022.
11
Milton Friedman, “The social responsibility of business to increase its profits,” New York Times Magazine, September 13, 1970.

2
 motives of customers, investors, or employees. ESG is something “good for the brand”
but not foundational to company strategy. It is additive and occasional. ESG ratings and
score provider MSCI, for example, found that nearly 60 percent of “say on climate” votes12
in 2021 were only one-time events; fewer than one in four of these votes were scheduled to
have annual follow-ups.13 Other critics have cast ESG efforts as “greenwashing,” “purpose
washing,”14 or “woke washing.”15 One Edelman survey, for example, reported that nearly three
out of four institutional investors do not trust companies to achieve their stated sustainability,
ESG, or diversity, equity, and inclusion (DEI) commitments.16

2. ESG is not feasible because it is intrinsically too difficult

A second critique of ESG is that, beyond meeting the technical requirements of each of
the E, S, and G components, striking the balance required to implement ESG in a way that
resonates among multiple stakeholders is simply too hard. When solving for a financial
return, the objective is clear: to maximize value for the corporation and its shareholders.
But what if the remit is broader and the feasible solutions vastly more complex? Solving
for multiple stakeholders can be fraught with trade-offs and may even be impossible.
To whom should a manager pay the incremental ESG dollar? To the customer, by way
of lower prices? To the employees, through increased benefits or higher wages? To
suppliers? Toward environmental issues, perhaps by means of an internal carbon tax? An
optimal choice is not always clear. And even if such a choice existed, it is not certain that a
company would have a clear mandate from its shareholders to make it.

3. ESG is not measurable, at least to any practicable degree

A third objection is that ESG, particularly as reflected in ESG scores, cannot be accurately
measured. While individual E, S, and G dimensions can be assessed if the required, auditable
data are captured, some critics argue that aggregate ESG scores have little meaning. The
deficiency is further compounded by differences of weighting and methodology across ESG
ratings and scores providers. For example, while credit scores of S&P and Moody’s correlated
at 99 percent, ESG scores across six of the most prominent ESG ratings and scores providers
correlate on average by only 54 percent and range from 38 percent to 71 percent.17 Moreover,
organizations such as the Global Reporting Initiative (GRI) and the Sustainability Accounting
Standards Board (SASB) can measure the same phenomena differently; for example, GRI
considers employee training, in part, by amounts invested in training, while SASB measures by
training hours. It is to be expected, therefore, that different ratings and scores providers—
which incorporate their own analyses and weightings—would provide diverging scores.
Moreover, major investors often use their own proprietary methodologies that draw from a
variety of inputs (including ESG scores), which these investors have honed over the years.

12
 ay-on-climate votes are generally nonbinding resolutions submitted to shareholders (similar to “say-on-pay” resolutions), which
S
seek shareholder backing for emissions reductions initiatives. See, for example, John Galloway, “Vanguard insights on evaluating
say on climate proposals,” Harvard Law School Forum of Corporate Governance, June 14, 2021.
13
“ Say on climate: Investor distraction or climate action?,” blog post by Florian Sommer and Harlan Tufford, MSCI, February 15,
2022.
14
 aurie Hays, et al., “Why ESG can no longer be a PR exercise,” Harvard Law School Forum on Corporate Governance, January 20,
L
2021.
15
 ee Owen Jones, “Woke-washing: How brands are cashing in on the culture wars,” Guardian, May 23, 2019; Vivek Ramaswamy,
S
Woke Inc.: Inside Corporate America’s Social Justice Scam, New York, NY: Hachette Book Group, 2021.
16
Special report: Institutional investors, Edelman Trust Barometer, 2021.
17
 lorian Berg, Julian Kölbel, and Roberto Rigobon, “Aggregate confusion: The divergence of ESG ratings,” Review of Finance,
F
forthcoming, updated April 26, 2022.

3
 4. Even when ESG can be measured, there is no meaningful relationship with
financial performance
The fourth objection to ESG is that positive correlations with outperformance, when they
exist, could be explained by other factors and, in any event, are not causative. It would indeed
challenge reason if ESG ratings across ratings and scores providers, measuring different
industries, using distinct methodologies, weighting metrics differently, and examining a
range of companies that operate in various geographies, all produced a near-identical
score that almost perfectly matched company performance. Correlations with performance
could be explained by multiple factors (for example, industry headwinds or tailwinds) and
are subject to change.18 Several studies have questioned any causal link between ESG
performance and financial performance.19 While, according to a recent metastudy, the
majority of ESG-focused investment funds do outperform the broader market,20 some ESG
funds do not, and even those companies and funds that have outperformed could well have
an alternative explanation for their outperformance. (For example, technology and asset-
light companies are often among broader market leaders in ESG ratings; because they have
a relatively low carbon footprint, they tend to merit higher ESG scores.) The director of one
recent study21 proclaimed starkly: “There is no ESG alpha.”22

In addition to these four objections, recent events and roiled markets have led some
to call into question the applicability of ESG ratings at this point.23 It is true that the
recognized, pressing need to strengthen energy security in the wake of the invasion of
Ukraine may lead to more fossil-fuel extraction and usage in the immediate term, and the
global collaboration required for a more orderly net-zero transition may be jeopardized
by the war and its aftermath. It is also likely that patience for what may be called
“performative ESG,” as opposed to what may be called true ESG, will likely wear thin. True
ESG is consistent with a judicious, well-considered strategy that advances a company’s
purpose and business model (exhibit).

Yet, many companies today are making major decisions, such as discontinuing
operations in Russia, protecting employees in at-risk countries, organizing relief to
an unprecedented degree, and doing so in response to societal concerns. They also
continue to commit to science-based targets and to define and execute plans for
realizing these commitments. That indicates that ESG considerations are becoming
more—not less—important in companies’ decision making.

Sustainable performance is not possible without

social license
The fundamental issue that underlies each of the four ESG critiques is a failure to take
adequate account of social license—that is, the perception by stakeholders that a

18
 ee, for example, James Mackintosh, “Credit Suisse shows flaws of trying to quantify ESG risks,” Wall Street Journal, January 17,
S
2022.
19
See, for example, Chart of the Week, “Does ESG outperform? It’s a challenging question to answer,” blog post by Raymond Fu,
Penn Mutual, September 23, 2021; Gregor Dorfleitner and Gerhard Halbritter, “The wages of social responsibility—where are
they? A critical review of ESG investing,” Review of Financial Economics, Volume 26, Issue 1, September 2015.
20
 lrich Atz, Casey Clark, and Tensie Whelan, ESG and financial performance: Uncovering the relationship by aggregating
U
evidence from 1,000 plus studies published between 2015 – 2020, NYU Stern Center for Sustainable Business, 2021.
21
 iovanni Bruno, Mikheil Esakia, and Felix Goltz, “‘Honey, I shrunk the ESG alpha’: Risk-adjusting ESG portfolio returns,” Journal of
G
Investing, April 2022.
22
Steve Johnson, “ESG outperformance narrative ‘is flawed,’ new research shows,” Financial Times, May 3, 2021.
4
23
See James Mackintosh, “War in Ukraine reveals flaws in sustainable investing,” Wall Street Journal, March 27, 2022.
 Web 2022
DoesESGMatter
Exhibit
Exhibit 1 of 1

True ESG is consistent with a company’s well-considered strategy and advances

its business model.
Description and examples¹
Environmental Social Governance

Addresses impact on the physical Addresses social impact and Assesses timing and quality of
environment and the risk of a associated risk from societal actions, decision making, governance
company and its suppliers/partners employees, customers, and the structure, and the distribution of
from climate events communities where it operates rights and responsibilities across
different stakeholder groups, in
• Climate change and greenhouse- • Labor practices service of positive societal impact
gas emissions (GHG) and risk mitigation
• Health and safety
• Air pollution (non-GHG)
• Community engagement; diversity • Business ethics, data security
• Water and wastewater and inclusion • Capital allocations, supply chain
management
• Community relations, local management
• Waste and hazardous-materials economic contribution • Governance structure and
management; circularity
• Product and service attributes engagement; incentives
• Biodiversity and ecosystems;
• Policies; external disclosures;
rehabilitation
position and advocacy

¹Examples are not exhaustive

business or industry is acting in a way that is fair, appropriate, and deserving of trust.24
It has become dogma to state that businesses exist to create value in the long term.
If a business does something to destroy value (for example, misallocating resources
on “virtue signaling,” or trying to measure with precision what can only be imperfectly
estimated, at least to date, through external scores), we would expect that criticisms of
ESG could resonate, particularly when one is applying a long-term, value-creating lens.

But what some critics overlook is that a precondition for sustaining long-term value is to
manage, and address, massive, paradigm-shifting externalities. Companies can conduct
their operations in a seemingly rational way, aspire to deliver returns quarter to quarter,
and determine their strategy over a span of five or more years. But if they assume that
the base case does not include externalities or the erosion of social license by failing to
take externalities into account, their forecasts—and indeed, their core strategies—may
not be achievable at all. Amid a thicket of metrics, estimates, targets, and benchmarks,
managers can miss the very point of why they are measuring in the first place: to ensure
that their business endures, with societal support, in a sustainable, environmentally
viable way.

Accordingly, the responses to ESG critics coalesce on three critical points: the acute
reality of externalities, the early success of some organizations, and the improvement of
ESG measurements over time. And the case for ESG cannot be dismissed by connections
between ESG scores and financial performance and changes in ESG scores over time.
(For a discussion about ESG ratings and their relationship to financial performance, see
sidebar, “ESG ratings: Does change matter?”)

24
“ ‘Corporate diplomacy’: Why firms need to build ties with external stakeholders,” Knowledge at Wharton, May 5, 2014; and
Witold J. Henisz, Corporate Diplomacy: Building Reputations and Relationships with External Stakeholders, first edition,
London, UK: Routledge, 2014; see also Robert G. Boutilier, “Frequently asked questions about the social license to operate,”
Impact Assessment and Project Appraisal, Volume 32, Issue 4, 2014.

5
 ESG ratings:
Does change matter?
Among the most sharply debated questions article. Our initial research indicates, however,
about environmental, social, and governance that it is too soon to tell. We found that on
(ESG) is the extent to which ESG, as measured average companies that show an improvement
by ratings, can offer meaningful insights in ESG ratings over multiyear time periods may
about future financial or TSR performance— exhibit higher shareholder returns compared
particularly when ratings and scores providers with industry peers in the period after the
use different, and sometimes mutually improvement in ESG scores. We found, too, that
inconsistent, methodologies. A number of the effect of this result has increased in recent
studies find a positive relationship between years (exhibit). This initial finding is in line with
ESG ratings and financial performance.1 Other some of the recent academic research and
research suggests that while scoring well was also generally consistent across data from
in ESG does not destroy financial value, the multiple ratings and scores providers.
relationship between ESG ratings at any given
time, and value creation at the identical time, Still, the findings are not yet conclusive. For
can be tenuous or nonexistent.2 Because of example, only 54 percent of the companies we
the short time frame over which the topic has categorize as “improvers” and less than one-
been studied, and the resulting lack of robust half of those categorized as “slight improvers”
analyses, conclusions from the analyses should demonstrated a positive excess TSR. The
be tempered.3 research also does not prove causation. It is
important to bear in mind that ESG scores are
In exploring the connection between ESG still evolving, observations in the aggregate may
ratings and financial performance, another be less applicable to companies considered
approach is to look at the effect of a change in individually, and exogenous factors such
ESG ratings. This approach mitigates issues as headwinds and tailwinds in industries and
deriving from differences among various individual companies cannot be fully controlled for.
ESG rating methodologies (assuming the
methodologies are relatively consistent over Most important, this research does not explain
time). It stands to reason that demonstrating real the mechanism of TSR outperformance and
improvement—if reflected in the scores—could, whether the outperformance is sustainable.
in turn, drive TSR outperformance for multiple We know from decades of research that
reasons, including those we explore in this companies with a higher expected return

1
 lorian Berg, Julian Kölbel, and Roberto Rigobon, “Aggregate confusion: The divergence of ESG ratings,” Review of Finance, forthcoming,
F
updated April 2022; Ulrich Atz, Casey Clark, and Tensie Whelan, ESG and financial performance: Uncovering the relationship by aggregating
evidence from 1,000 plus studies published between 2015–2020, NYU Stern Center for Sustainable Business, 2021.
2
See Chart of the Week, “Does ESG outperform? It’s a challenging question to answer,” blog post by Raymond Fu, Penn Mutual, September
23, 2021; Giovanni Bruno, Mikheil Esakia, and Felix Goltz, “‘Honey, I shrunk the ESG alpha’: Risk-adjusting ESG portfolio returns,” Journal of
Investing, April 2022.
3
 hen the ESG characteristic of a company changes, based on MSCI ESG data, it may be a useful financial indicator for generating alpha.
W
Guido Giese et al., “Foundations of ESG investing: How ESG affects equity valuation, risk, and performance,” Journal of Portfolio Management,
July 2019, Volume 45, Number 5.

6
 Web 2022
DoesESGMatter
Exhibit1 of 1
Sidebar

Changes to ESG scores seem to be correlated to TSR, but given the underlying
measurement challenges the result is not conclusive.

TSR by change in ESG score¹

Median of annualized, excess TSR² Companies³ with positive Number of
from 2017–21, % excess in TSR, %⁴ companies

Deteriorators –2.8 39 221

Slight deteriorators –1.5 45 220

Slight improvers –0.2 49 1,097

Improvers 1.5 54 1,097

1
Based on ESG scores of S&P Global for fiscal years 2017–2021. 2021 data is updated through Jan 18, 2022.
2
Annualized TSR is defined as the CAGR of the dividend-adjusted share price between 2017 and 2021 in companies’ local currency
3
Companies decreasing in S&P Global ESG score are categorized as deteriorators and slight deteriorators. Companies increasing in S&P Global ESG score are
categorized as improvers and slight improvers.
4
Results statistically significant (p-value <0.01) with Mann-Whitney U test between improvers and deteriorators, but not (p-value ~0.2) between slight
deteriorators and deteriorators.
Source: S&P Global Sustainable1; McKinsey ESG Insights

on capital and growth are ultimately TSR from ESG ratings, but they do not get unduly
outperformers and that there is clear, distracted or make superficial changes merely
statistically significant correlation. Are ESG to score higher. Companies should focus on
ratings a sign of greater expected resilience of ESG improvements that matter most to their
margins in the transition, an indication of higher business models, even if the improvements do
growth through green portfolios—or do they not directly translate to higher ratings.
suggest something else? Will these increased
expectations relative to peers ultimately Since conclusions about the relationship
materialize, or will they revert to the mean? ESG between ESG ratings and financial
ratings are very new compared with financial performance are not yet certain, they might
ratings, and therefore, it will take time for them not be compelling enough, on their own, to
to evolve. We will continue to research these persuade executives to invest significant
questions as data sets increase and refinements resources in ESG. But there is a tangible cost to
to ESG scores continue to be refined. waiting. In fact, companies should adopt a bias
toward focusing on ESG today; if companies,
Regardless of current ratings scores, many particularly those with significant externalities
companies are already advancing in ESG to (such as high-emitting industries), hold out for
improve their long-term financial performance. perfect data and a “flawless” rating process,
High performers consider and seek to learn they may not have a business in 20 to 30 years.

7
 1. Externalities are increasing
Company actions can have meaningful consequences for people who are not immediately
involved with the company. Externalities such as a company’s GHG emissions, effects
on labor markets, and consequences for supplier health and safety are becoming an
urgent challenge in our interconnected world. Regulators clearly take notice.25 Even if
some governments and their agencies demand changes more quickly and more forcefully
than others, multinational businesses, in particular, cannot afford to take a wait-and-
see approach. To the contrary, their stakeholders expect them to take part now in how
the regulatory landscape, and broader societal domain, will likely evolve. More than
5,000 businesses, for example, have made net-zero commitments as part of the United
Nations’ “Race to Zero” campaign. Workers are also increasingly prioritizing factors such
as belonging and inclusion as they choose whether to remain with their company or join
a competing employer.26 Many companies, in turn, are moving aggressively to reallocate
resources and operate differently; nearly all are feeling intense pressure to change. Even
before the Ukraine war induced dramatic company action, the pandemic had prompted
companies to reconsider and change core business operations. Many have embarked on
a similar path with respect to climate change. This pressure, visceral and tangible, is an
expression of social license—and it has been made more pressing as rising externalities
have become more urgent.

2. Some companies have performed remarkably, showing that ESG success is

indeed possible
Social license is not static, and companies do not earn the continued trust of consumers,
employees, suppliers, regulators, and other stakeholders based merely upon prior actions.
Indeed, earning social capital is analogous to earning debt or equity capital—those
who extend it look to past results for insights about present performance and are most
concerned with intermediate and longer-term prospects. Yet unlike traditional sources
of capital, where there are often creative financing alternatives, there are ultimately no
alternatives for companies that do not meet the societal bar and no prospect of business
as usual, or business by workaround, under conditions of catastrophic climate change.

Because ESG efforts are a journey, bumps along the way are to be expected. No company
is perfect. Key trends can be overlooked, errors can be made, rogue behaviors can
manifest themselves, and actions can have unintended consequences. But since social
license is corporate “oxygen”—thus impossible to survive without it—companies cannot
just wait and hope that things will all work out. Instead, they need to get ahead of future
issues and events by building purpose into their business models and demonstrating
that they benefit multiple stakeholders and the broader public. Every firm has an implicit
purpose—a unique raison d’être that answers the question, “What would the world lose if
this company disappeared?” Companies that embed purpose in their business model not
only mitigate risk; they can also create value from their values. For example, Patagonia,
a US outdoor-equipment and clothing retailer, has always been purpose driven—and
announced boldly that it is “in business to save our home planet.” Natura &Co, a Brazil-
based cosmetics and personal-care company in business to “promote the harmonious
relationship of the individual with oneself, with others and with nature,” directs its ESG

25
 ee, for example, Sinziana Dorobantu, Witold J. Henisz and Lite J. Nartey, “Spinning gold: The financial returns to stakeholder
S
engagement,” Strategic Management Journal, December 2014, Volume 35, Issue 12.
26
“‘Great Attrition’ or ‘Great Attraction’? The choice is yours,” McKinsey Quarterly, September 8, 2021.

8
 efforts to initiatives such as protecting the Amazon, defending human rights, and
embracing circularity. Multiple other companies, across geographies and industries, are
using ESG to achieve societal impact and ancillary financial benefits, as well.

3. Measurements can be improved over time

While ESG measurements are still a work in progress, it is important to note that there
have been advancements. ESG measurements will be further improved over time.
They are already changing; there is a trend toward consolidation of ESG reporting and
disclosure frameworks (though further consolidation is not inevitable). Private ratings
and scores providers such as MSCI, Refinitiv, S&P Global, and Sustainalytics, for their
part, are competing to provide insightful, standardized measures of ESG performance.

There is also a trend toward more active regulation with increasingly granular
requirements. Despite the differences in assessing ESG, the push longitudinally has
been for more accurate and robust disclosure, not fewer data points or less specificity.
It is worth bearing in mind, too, that financial accounting arose from stakeholder pull,
not from spontaneous regulatory push, and did not materialize, fully formed, along the
principles and formats that we see today. Rather, reporting has been the product of
a long evolution—and a sometimes sharp, debate. It continues to evolve—and, in the
case of generally accepted accounting principles (GAAP) and International Financial
Reporting Standards (IFRS) reporting, continues to have differences. Those differences,
reflecting how important these matters are to stakeholders, do not negate the case for
rigorous reporting—if anything, they strengthen it.

While the acronym ESG as a construct may have lost some of its luster, its underlying
proposition remains essential at the level of principle. Names will come and go (ESG itself
arose after CSR, corporate engagement, and similar terms), and these undertakings
are by nature difficult and can mature only after many iterations. But we believe that the
importance of the underlying ideas has not peaked; indeed, the imperative for companies
to earn their social license appears to be rising. Companies must approach externalities
as a core strategic challenge, not only to help future-proof their organizations but to
deliver meaningful impact over the long term.

Lucy Pérez is a senior partner in McKinsey’s Boston office; Vivian Hunt is a senior partner in the London
office; Hamid Samandari is a senior partner in the New York office; Robin Nuttall is a partner in the
London office; and Krysta Biniek is a senior expert in the Denver office.

The authors wish to thank Donatela Bellone, Elena Gerasimova, Ashley Gorman, Celine Guo, Pablo Illanes,
Conor Kehoe, Tim Koller, Lazar Krstic, Burak Ovali, Werner Rehm, and Sophia Savas for their contributions
to this article.

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