Davos Agenda

The big fallacy in the backlash against ESG and stakeholder capitalism

ESG and stakeholder capitalism are key business concerns now – and should be rigorously implemented.

ESG and stakeholder capitalism are key business concerns now – and should be rigorously implemented. Image: Getty Images/iStockphoto

Richard Samans
Director of Research, International Labour Organization (ILO)
Jane Nelson
Director, Corporate Responsibility Initiative, Harvard Kennedy School of Government
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Davos Agenda

This article is part of: World Economic Forum Annual Meeting

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  • Critics of ESG and stakeholder capitalism underestimate their growing importance for firm financial performance.
  • Stewardship of intangible assets, including particularly people and data, matters more than ever for value creation.
  • Walking the talk of stakeholder capitalism requires systematic ESG integration in boards, strategy and reporting.

Most corporate boards and institutional investors now accept that certain environmental, social and governance (ESG) risks and opportunities can be financially material — that is to say, they can affect the economic performance of firms. A growing proportion also subscribes to the related corporate governance principle that firms should be run in the long-term interests of all their principal stakeholders – including but not limited to shareholders. But while the ESG investing and stakeholder capitalism movements remain ascendant, they are facing a backlash.

ESG and stakeholder capitalism: what the critics have to say

One group of critics focuses on the inconsistent implementation of these frameworks by their champions. Some see this as hypocrisy and performative virtue-signalling – CEOs and boards playing to the grandstand of popular opinion or special interests on pet issues. Others ascribe a darker motive, claiming that it is an elaborate smokescreen to create the illusion of progress and undermine popular support for stronger government action.

A second group of detractors challenge the very premise of ESG investing and stakeholder capitalism. Some argue that if they are financially material, then by definition managers and directors focused on maximizing shareholder value already take them into account. Others assert that these concepts are inherently unworkable because they are bound to politicize decision-making within firms, tangling them up in knots in ways that misallocate resources. Still others say that any stakeholder/shareholder dilemmas and trade-offs will inevitably be resolved in shareholders’ favour, so what’s the point?

Have you read?

Each of these criticisms contains a germ of truth – just enough to make them effective as debating points or cautionary tales. But none amounts to anything close to a disqualifying argument. This is mainly due to financial materiality’s inescapable logic for those directors, managers and investors who take their fiduciary responsibilities seriously. Attention to ESG issues and related stakeholder interests cannot be dismissed as mere public relations or politics for the simple reason that history has shown – and recent disruptive shifts in technology, the environment, geopolitics and societal attitudes are underscoring – that they are increasingly important factors in the preservation and creation of enterprise value.

As for value preservation, there is a long history of boards and investors being blindsided by lapses in their company’s stewardship of ESG and stakeholder capitalism matters, resulting in a sharp decline in market value. Think BP’s Deepwater Horizon explosion in the Gulf of Mexico; Volkswagen’s manipulation of emission tests; Facebook’s data privacy violations; Kobe Steel’s falsification of product safety data; Odebrecht’s, Siemens’ and Airbus’ bribery violations; Uber, Google and Weinstein Co.’s sexual harassment scandals; etc.

Research by Bank of America Merrill Lynch found that 15 out of the 17 S&P 500 bankruptcies from 2005 to 2015 were in companies with poor environmental and social scores five years before these events, and major ESG‑related controversies were accompanied by peak‑to‑trough market capitalization losses of half a trillion dollars for large US companies between 2013 and 2019.

The appropriate response to lax diligence in the exercise of corporate governance is not to dismiss or rationalize away the related risks, but rather to apply greater rigour in understanding and mitigating them.

ESG and stakeholder capitalism considerations can be material to enterprise value creation as well. For example, climate change, water, biodiversity and other aspects of environmental stewardship have an important bearing on a firm’s performance relative to its peers in a world in which related technology, regulation and physical impacts are changing within the space of years and sometimes months. The same is true for the management of intangible assets, particularly people. The continuous cultivation of the talent, motivation, diversity and well-being of a firm’s workforce, as well as the responsible development and stewardship of its intellectual property, including new technologies, process innovations and data, are increasingly important drivers of business value creation in the Fourth Industrial Revolution.

Accounting and reporting practices have yet to adapt adequately to the rising importance of intangible assets in this new era. There is a significant discrepancy between market capitalization and reported assets, estimated to be on the order of two-to-one. With half of market capitalization effectively unaccounted for, managers and investors have a skewed view of their firm’s ability to create long-term value if they are only or even mainly looking at the financial aspects of its performance. Human capital – the skills, empowerment and creativity of a firm’s workforce – has long been an area of underinvestment by companies as well as governments.

Thus, the economic case for rigorously integrating non-financial and intangible aspects of corporate performance into a firm’s core strategy and management practices is strong; these factors are central to value creation and resilience in today’s more technologically disruptive, environmentally constrained, socially fragile and geopolitically uncertain business context. For this reason, business leaders need to transcend the traditional, segmented logic of shareholder and stakeholder considerations – exemplified by the concepts of shareholder primacy and corporate social responsibility. They should instead be effectively integrated through the systematic internalization of material ESG risks and opportunities in corporate governance, strategy, resource allocation and reporting.

Full ESG integration of this nature is what gives practical effect to the principles and values of stakeholder capitalism – how companies walk the talk of sustainable enterprise value creation. Viewed in this light, the ESG and stakeholder capitalism movements are fundamentally about good governance – strengthening due diligence in the exercise of fiduciary responsibility within a business operating context undergoing profound change.

Criticism of weak or inconsistent implementation is fair game, and indeed most companies and investors are only beginning to rigorously integrate ESG considerations into their core decision-making processes. But those who seek to politicize ESG investing and stakeholder capitalism by conflating them with the broader cultural debate about “wokeism” or impugning the motives of directors, executives and investors seriously underestimate the changing nature of business value creation.


How is the World Economic Forum helping companies track their positive contributions towards achieving the Sustainable Development Goals?

The debate about how corporate and investor governance should adapt to the economic and social transformations of the 21st century merits a deeper, less polemical examination of what really matters for the performance of firms and economies in this new era.

• The views expressed here are the authors’ alone and based on their forthcoming book Sustainable Enterprise Value Creation: Implementing Stakeholder Capitalism Through Full ESG Integration.

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