Today, we see ESG built into the corporate structure, a pillar in major corporate investment models with more than $30trillion in ESF-related AUM as of 2023. Yet questions have emerged about the true relevance of ESG today and whether investment returns are being sacrificed for the sake of “green” or so-called “socially responsible” investment vehicles. Questions are being asked about whether companies are using it as a marketing tool to appear responsible, without enacting meaningful change. Additionally, concerns about inconsistent reporting standards, “greenwashing,” and the role of ESG in investment strategies, have cast doubts on whether it truly drives long-term value or merely adds a ‘filter of sustainability’ to the lens of business operations.So, the question arises: is ESG still relevant in today’s evolving business landscape?
Why do we need ESG to be relevant?
ESG theory encapsulates issues that are central to both societal progress and economic viability on a global scale.
The climate crisis is real: Climate change, for example, is no longer a distant possibility but a present reality. Regulatory pressures are intensifying as governments around the world, from the EU to China, tighten their environmental standards. ESG allows companies to prepare for this future by reducing their carbon footprints, investing in renewable energy, and adopting sustainable business practices. Thus, making the Environment not just a feel-good talking point, but a necessity for businesses looking to navigate regulatory landscapes and climate risks.
Social equity matters: With the narrative of increased social justice and greater equity on the rise, the importance of inclusivity, competitive wages, and fair treatment of employees, has become paramount. Investors and customers alike are demanding that companies uphold their social responsibilities, pushing businesses to align with societal expectations. A focus on Sustainability can drive better business outcomes by attracting top talent, improving customer loyalty, and ensuring resilient supply chains.
Responsible business requires discipline: Governance remains as crucial as ever. Companies that engage in poor governance, lack of transparency, corruption, or unethical behaviour—suffer financially in the long run. Strong governance frameworks that prioritise board diversity, ethical decision-making, and shareholder engagement can safeguard a company against potential crises, from legal liabilities to public relations disasters. Governance acts as a shield, protecting businesses from the reputational and financial pitfalls of mismanagement.
Greenwashing and the need for Standardization: ESG in a fishbowl.
Despite its importance, ESG has been met with natural skepticism.
The risk of optics mattering more than reality: Opposition says that ESG initiatives often amount to little more than “greenwashing”—a practice where companies make exaggerated or misleading claims about their environmental or social efforts to gain public approval. For instance, a company may boast about its commitment to reducing emissions, while continuing to fund fossil fuel projects or operate in environmentally harmful industries. Without clear and universally accepted standards, it becomes difficult to assess whether a company is truly sustainable or just playing to public sentiment.
Inconsistency in reporting: Another issue lies in the lack of consistency in ESG reporting. With no unified framework, companies are free to pick and choose which metrics to report on, often skewing their ESG data in a favorable direction. Investors who are seeking to build sustainable portfolios are left to navigate a confusing maze of ESG scores and rankings, many of which are based on different criteria. This lack of standardization undermines the credibility of ESG as a tool for evaluating corporate performance.
Debate on financial outcomes: Moreover, some argue that ESG may even compromise financial returns. While there is growing evidence that integrating ESG factors can enhance long-term returns, critics claim that it distracts companies from their primary mission—delivering shareholder value. In this view, ESG represents an additional cost, steering resources away from strategies that stimulate innovation and profitability. Skeptics also point out that ESG-driven investment strategies miss out on lucrative opportunities in high-return industries that don’t align with ESG goals, such as the controversial oil and gas industry. Indeed, these concerns have resulted in some severe pushback from investors -- notably in the US public sector where several state shave been enacted laws against ESG-related portfolio investments.
Theory meets Reality: Carving out ESG’s future
Despite these criticisms, the relevance of ESG is unlikely to diminish radically. Rather, the framework needs refining to address its shortcomings and ensure that it drives real change.
ESG integrated with business strategy and performance metrics: Companies must move beyond superficial ESG initiatives and embrace long-term, measurable strategies that align with their core business models. Greenwashing and inconsistent reporting can be mitigated through stricter regulations, such as the EU’s Corporate Sustainability Reporting Directive (CSRD), which aims to standardize ESG disclosures and ensure companies provide accurate data.
ESG as a risk mitigant: For investors, a shift in focus is required—away from the idea that ESG is about sacrificing returns for the greater good and toward the notion that ESG factors are critical to long-term risk management. Companies that fail to address environmental risks or treat their workers poorly may find themselves outpaced by competitors that invest in sustainability and strong governance. ESG, in this sense, can be seen as an extension of a company’s risk assessment and resilience strategy, not a separate add-on or a means to checking a box.
Technology as an enabler: Furthermore, technology and data-driven solutions can play a pivotal role in strengthening the ESG framework. Advanced analytics and AI capabilities can now track environmental and social impacts more effectively, ensuring that companies are held accountable for their actions.
In Conclusion
ESG remains highly relevant, but it must evolve to meet the challenges of the modern world. While concerns over greenwashing, inconsistent reporting, and financial returns are valid, they are not insurmountable. With the right regulations, technologies, and investor focus, ESG can be transformed into a powerful tool for shaping the future of business.
It’s not a question of whether ESG is still relevant, but how we can ensure it continues to be a driving force for meaningful change in a world that demands more from its businesses than ever before.
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