Does Unilever’s u-turn mean businesses are giving up on ESG?

Unilever has long been lauded as the most socially responsible and sustainably minded large business in the world, famously setting each of its brands – from Marmite to Domestos – an individual, ESG-linked ‘mission’. This month, however, it changed tack radically.

Hein Schumacher, its CEO since the summer of 2023, told the media: “I’m not going to shout that ‘we’re saving the world’” as he axed a range of ESG targets, including pledges to halve food waste, hire more disabled staff and slash its use of plastic.
Commentators were shocked, but Unilever is just the latest in a long line of companies to quietly shelve ESG ambitions as they meet cold, hard financial realities. Indeed, while it may be an exaggeration to say business’s commitment to environmental, social and governance goals is in crisis, it is undoubtedly undergoing a significant reset.

Schumacher’s pronouncement is particularly notable because Unilever’s previous leader, Paul Polman, was known for his almost messianic zeal for ESG. “Unilever, and Paul Polman in particular, was held up as this poster child of purpose and ESG,” says Colin Mayer, emeritus professor of management studies at Said Business School at the University of Oxford. “If anyone ever needed a case to illustrate [it], they would always look to Unilever.”

There are broader signs of fatigue around ESG. FactSet says the number of multinationals citing the topic on earnings calls has now reached its lowest level since 2020, when the pandemic was the overarching subject of discussion. KPMG’s 2023 CEO Outlook found that for the first time, geopolitics was viewed as a more significant risk among leaders.

In Unilever’s case, it had been targeted by notorious activist investor Nelson Peltz, who was openly sceptical of the business’s focus on purpose. This was the same playbook that led to the 2021 removal of CEO Emmanuel Faber at Danone, another business that had put sustainability front and centre of its strategy.

But Unilever had also reported a fall in profits of 9.7% for 2023, and it is this apparent inability to be both ‘woke’ and profitable that is at the heart of the problem, says Andrew Kakabadse, professor of governance and leadership at Henley Business School. “Businesses are trying to apply ESG principles but they can’t turn them into numbers, and if you can’t do that, it means you have nothing. So many businesses are facing targets they can’t integrate with the notion of the firm and its competitive advantage.” In such circumstances, he adds, ESG just becomes a cost for boards to bear.

That isn’t a problem in times of plenty – but the tightening economic environment is making investors nervous. As Mayer points out, Polman was able to treble Unilever’s share price during his tenure, which meant he could pursue his passion for purpose unhindered. Schumacher is operating in very different circumstances.

Additionally, in the US, ESG has become such a politically unpopular term that many businesses are being lobbied to drop overt discussion of such topics from their corporate narratives. There is also a sense that many targets set a decade or more ago, particularly around diversity and sustainability, are proving more difficult to realise than leaders expected: this echoes the experience at a governmental level, with Scotland most recently admitting its green policies had been too ambitious, sparking a national political crisis.

The climate crisis and societal inequality certainly aren’t going away. But it’s clear that ESG can longer be seen as an add-on to corporate strategy. “The problem that emerged, not just in Unilever but also in Danone, was that the notion of what a purpose was about was fixated on this ESG agenda, essentially driven by environmental and social considerations,” says Mayer. “But it’s not – it’s driven by the notion of problem solving. The reason why some companies are finding this difficult is that it’s being marketed as an ESG agenda and objective when in fact it should be thought of as an overarching strategy for driving commercial value.”

Kakabadse adds that too many boards do not understand where their competitive advantage comes from. “In the last three or four years the boardroom debate on stakeholder relations has been more intense than ever,” he says. “From what I’ve seen of boards, they are just beginning to understand what sensitive international stakeholder relations are all about. In many ways, it’s not a new problem but it’s a new experience for them. Many boards are just not prepared.”

It’s clear that simply being socially conscious does not make you a successful business. Studies have attempted to make this link – most recently, global risk advisor Kroll analysed 13,000 publicly traded companies and said those with higher ESG ratings outperformed their peers financially. But like its predecessors, it failed to prove a causal link between the two.

At the same time, the pressure on businesses from employees, activist ‘green’ investors and governments to act on ESG issues remains. CEOs and boards are going to have to find a way to define and execute policies that aligns with broader business strategy and which, crucially, does not affect the bottom line. “There have been a lot of problems with ESG in terms of the way in which it’s measured, the extent to which it’s audited, the lack of consistency between different providers and not least that there are two very conflicting interpretations of what it means,” says Mayer.