Disney (DIS) and Apple (AAPL) became the latest companies in the crosshairs of anti-ESG efforts after Vivek Ramaswamy, the executive chairman of Peter Thiel-backed Strive Capital, sent letters to the companies urging them to halt diversity audits and avoid making political statements.

In the letter released on Monday, the "Woke, Inc." author railed against the companies and financial institutions for promoting "one-sided political agendas." Ramaswamy has been a vocal critic of the practice of incorporating environmental, social, and corporate governance issues, known as ESG, into corporate and investment decision-making.

ESG has become more entrenched in the financial world. But like everything else these days, it's attracting scrutiny and skepticism from all quarters. In other words: from Wall Street to the Comptroller's office in Texas, ESG has become a lightning rod — and the end game, at this point, isn't exactly clear.

At its core, the ESG approach gauges potential risks and opportunities not usually accounted for in financial measures. These factors range from a company's exposure to climate-related risk to board room diversity.

Folks like Ramaswamy aside, ESG strategies have gained traction. In 2020, 92% of S&P 500 companies and 70% of Russell 1000 companies published an ESG-related sustainability report, according to Governance & Accountability Institute, up from just 20% a decade earlier. And nearly a third of S&P 500 companies mentioned ESG on their earnings calls in the fourth quarter of 2021, Factset reported.

But the acronym has ballooned into a shorthand expression for a variety of different meanings. It could represent an investment framework for risk analysis, corporate responsibility efforts, or an ideological agenda, depending on who you ask. Without uniform standards or definitions, the belief that ESG can serve all stakeholders equally has weakened lately. Even adherents have raised a number of concerns about ESG, including the difficulty in measuring impact, potential interference with business operations, tradeoffs across the three pillars of ESG, and a murky relationship with financial performance.

The backlash over ESG has arrived in a number of forums: op-eds, Elon Musk tweets, scrutiny from state politicians, and an anti-ESG fund from Strive Capital backed by PayPal co-founder and Republican activist Peter Thiel that has raised more than $250 million. These politically-charged allegations that ESG is an apparatus for ushering in "woke" capitalism have added to a storm of challenges for the strategy long dominated by an optimistic streak.

Still, investors and companies don't appear to be dialing back their commitments. In fact, some are taking the concept even further. Patagonia, long held up for its exemplary sustainability practices, recently pushed the envelope again when its founders announced they donated the $3 billion company to fight climate change.

“We're getting to a point now where ESG has kind of moved out of purely financial circles and into the mainstream,” Lindsey Stewart, director of investment stewardship at Morningstar, told Yahoo Finance. “And people are starting to really ask: 'What does that mean in practice for me for my business, for my portfolio?' And perhaps the answers that we landed on even as recently as last year are not necessarily the same ones that we'll end on this year or next year with new risks emerging."

Among those who are skeptical of ESG's lofty goals include Tariq Fancy, the former head of sustainable investing at BlackRock. Fancy has become a vocal critic of ESG, likening it to "wheat grass to a cancer patient" and a "dangerous placebo."

“The real question at the bottom of ESG that's never really been answered satisfactorily is, are we doing this to make the world a better place or to improve investment returns?” Fancy told Yahoo Finance Live (video above). “And the promise by ESG is arguably three things: You get better returns, you make the world a better place, and asset managers get more in fees.”

“In reality," he added, "I can tell you only the third thing is happening.”

How ESG started

The term 'ESG' was minted in a 2004 UN Global Compact report that urged the financial industry to consider companies' environmental and social stewardship in order to compete in a more globalized world.

The notion that companies should be socially responsible for strategic or ethical reasons has been around for much longer, however. There was a divestment campaign in the 1980s against apartheid in South Africa and the development of new environmentally-focused frameworks such as the Global Reporting Initiative (GRI) and Carbon Disclosure Project in the late '90s. These initiatives usually fell under different terms, such as corporate social responsibility (CSR) or socially responsible investing (SRI), but the premise was similar.

Since ESG took over, it has grown tremendously, with the global pandemic, a racial reckoning stemming from the George Floyd protests in the U.S., and growing awareness of the human-created climate crisis fueling demand for ESG-labeled assets. Impressive returns generated by those funds in recent years also helped the cause.

While the relationship between ESG initiatives and financial returns has been the subject of debate and isn't yet settled, ESG integration and corporate efforts appear to boost performance and limit downside risk, especially over longer-term horizons, an NYU review of more than 1,000 research papers found.

Just how big has the market for ESG gotten? It's hard to tell.

By the Global Sustainable Investment Alliance's (GSIA) measure, as of 2020, $35 trillion in assets were held in sustainable investments — more than a third of all assets under management. That figure includes assets that are screened for desirable or undesirable factors as well as ESG incorporation, a broad definition that means some form of ESG consideration was taken into account alongside other investment strategies.

Morningstar, which accounts for global funds marked specifically as sustainable, says the amount held in sustainable funds is closer to $2.47 trillion after inflows into sustainable funds hit a new record in 2019 and then doubled in 2020.

Although there are discrepancies in the overall size of the market for ESG assets, it's clear the concept has become hard for companies to ignore.

“As the externalities are increasing and increasing in their complexity, it's basically reinforcing the need for companies to think about their purpose and how they address these externalities,” Lucy Peréz, a senior partner at McKinsey, told Yahoo Finance.

ESG faces backlash

The market for ESG-related assets took a step back in the second quarter with U.S. sustainable funds seeing outflows for the first time in five years as ESG faced crosswinds from tightening financial conditions, scrutiny over assets held in Russia prior to the country's invasion of Ukraine, and the onset of a bear market in the S&P 500.

There were other controversial moments earlier in 2022, such as when S&P Global removed EV maker Tesla from its benchmark ESG index but added Exxon Mobil, citing industry weighting and Tesla's social and governance ratings.

That led some — including Tesla chief Elon Musk — to point out apparent hypocrisy in the ESG approach. Critics argued that fund managers have been allowed to slap a green label onto standard assets in order to charge a higher fee or, in a more charitable view, they overpromise on environmental and social policies.

“The fact of the matter is when you dig into what (ESG) is today, it's primarily marketing policies that are non-binding, and they can't be binding because we have legal duties to focus only on sort of maximizing return,” Fancy said. “It's a set of products that really just shuffle around things that already exist so that you can give baskets of already traded publicly shares to socially conscious investors and get a fee bump.”

Regulators want to solve some of those problems by making it easier for investors to compare companies' exposures to climate change and clamp down on greenwashing. The next evolution of ESG investing will likely depend upon uniform standards and enhanced disclosure requirements.

In the U.S., the SEC is evaluating more than 14,000 comments on proposed rules that would require companies to disclose climate-related risks as well as their greenhouse gas emissions.

“Most of the comments are supportive," SEC Chair Gary Gensler told the Senate Banking Committee last Thursday. "Investors are using this information now, and they want the information, and I think it does fit into our 80-or-90-year history of how we do disclosures.”

Morningstar's Stewart sees ESG evolving; he noted that companies are including more specific environmental disclosures beyond carbon emissions and climate goals and have started to focus more on diversity initiatives and human rights as well.

However, better measurement of ESG factors such as emissions and water usage may just be a starting point for tackling these issues.

“In general, information and disclosure at the right level is a necessary, but not sufficient, condition for change across the board,” Hamid Samandari, senior partner at McKinsey and co-author of 'Does ESG really matter—and why?', told Yahoo Finance. “It will help with both internal decisions and the choices that other stakeholders make, but information in itself is not sufficient.”

The rise of anti-ESG

The backlash against ESG has taken another turn lately. Once consigned to financial circles, these debates are now being aired out in public as right-wing politicians slam Wall Street firms for their ESG strategies.

In late August, Florida Gov. Ron DeSantis banned state pension fund managers from taking environmental, social, and governance issues into consideration when making investment decisions. Texas enlisted a ban of its own, barring 348 funds and 10 companies, including BlackRock, UBS, and Credit Suisse, from doing business with the state over their vocal ESG stance and alleged "boycott" of the fossil fuel industry.

BlackRock, a promoter of sustainable investing with nearly $10 trillion in assets under management, rebuffed claims that it boycotts oil companies, asserting that it has $310 billion invested in energy companies, Bloomberg reported.

On Wednesday, blue states also hit back at those moves in an open letter signed by state treasurers and comptrollers from 15 states including Illinois, New York, California, and Maine.

"The blacklisting states apparently believe, despite ample evidence and scientific consensus to the contrary, that poor working conditions, unfair compensation, discrimination and harassment, and even poor governance practices do not represent material threats to the companies in which they invest," the letter stated. "They refuse to acknowledge, in the face of sweltering heat, floods, tornadoes, snowstorms and other extreme weather, that climate change is real and is a true business threat to all of us."

The dispute has also spread to shareholder meetings. Morningstar found that there were a record number of ESG resolutions during the 2022 proxy season, including a handful of anti-ESG proposals.

According to Morningstar's Stewart, the wording of these "Trojan Horse-like" proposals mimic that of ESG proposals. For instance, an anti-ESG proposal might request a company to disclose how its diversity initiatives affect groups without a history of exclusion.

“I see this anti-ESG push as the next extension of the ongoing culture war,” Morningstar ESG equity strategist Kristoffer Inton said in a Morningstar's report. “Many of these thoughts, and even some of the bills, are written without a great understanding of sustainable investing. Any investor who ignores ESG risk, like any other risk, does so at their own peril.”

While few of the 43 anti-ESG proposals received traction, they did offer groups a chance to voice complaints against ESG or advance a cause, especially at high-profile companies. The overwhelming number of proposals came from just three right-leaning groups: The National Legal and Policy Center, the National Center for Public Policy Research, and Steven J. Milloy, a lobbyist with ties to the tobacco and oil industries.

Is ESG on its way out?

While ESG strategy has come under fire, the demand for companies to pay attention to issues like climate change and worker conditions has remained resilient.

In a recent report, McKinsey partners argued there's one factor that ESG cynics are missing: corporate social license, or the trust held between a company and its stakeholders. “We do see room for improvement across all dimensions," McKinsey's Samandari said. "At the same time, we believe that the underlying impulse remains more valid than ever."

The authors held up the early successes of some companies as a reason for optimism. They also explained that improved measurements will also improve clarity on corporate actions and investments. “One of the things that we anticipate going forward is that there'll be an improvement in measurements as we've seen, for example, in other fields, such as financial accounting,” Peréz said.

ESG as a buzzword may ultimately dissolve — or evolve into something different. But the McKinsey partners contend that clients, investors, talent, and leaders have already started going in the direction of facing the climate crisis and other social issues, and that will continue.

“Will the acronym stay or go? I don't know, and this is not what is important,” Samandari said. "The underlying point that it is becoming increasingly difficult for companies to ignore what economists call externalities — that is, the unaccounted side effects of their operations within the society and the environment.”

Grace is an assistant editor for Yahoo Finance.

Read the latest news on the climate crisis from Yahoo Finance

Click here for the latest stock market news and in-depth analysis, including events that move stocks

Read the latest financial and business news from Yahoo Finance

Download the Yahoo Finance app for Apple or Android

Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, and YouTube