ESG assets are projected to reach $50 trillion by 2025, reflecting investors' growing desire to align their portfolios with their values. This makes intuitive sense—what's the point of building wealth if the planet becomes uninhabitable in the process?
But as this tidal wave of capital flows into "sustainable" investments, we must confront an uncomfortable truth: The ESG industry is failing to address humanity's most pressing environmental and social challenges. Worse still, it may be actively enabling harm while claiming to prevent it.
The Broken Promise
The fundamental promise of ESG is simple: companies with strong environmental, social, and governance practices should deliver better outcomes for people and planet. Yet the evidence increasingly suggests otherwise.
High ESG scores frequently fail to predict meaningful sustainability outcomes. Companies topping ESG rankings continue to expand fossil fuel production, perpetuate exploitative labor practices, and deplete natural resources at unsustainable rates. A 2023 study found that 72% of companies with above-average ESG ratings were simultaneously linked to serious environmental or social controversies.
Fossil fuel companies tout carbon offset programs while simultaneously expanding drilling operations. Fast fashion brands launch small "sustainable" collections while their business model remains fundamentally extractive. Banks promote "green" financial products while continuing to finance fossil fuel expansion.
As The Economist pointedly noted in 2022, "The fundamental contradiction of ESG is being laid bare."
The Financial Illusion
The second pillar of ESG's promise—that sustainable investing delivers superior financial performance—stands on equally shaky ground.
Recent research from Stanford University found that ESG funds performed no better than conventional investments when controlling for sector allocation and factor exposures. Other studies have shown minimal correlation between ESG ratings and either risk reduction or enhanced returns.
This raises profound questions: If ESG ratings fail to identify companies making genuine progress on sustainability, and don't consistently deliver financial outperformance, what purpose do they actually serve?
The Industry Complicity Problem
The answer lies partly in following the money. The ESG industry—rating agencies, consultants, data providers, and standard-setters—has grown into a multi-billion-dollar sector that profits from complexity and opacity.
ESG ratings firms sell proprietary methodologies that produce wildly divergent results. The same company can rank in the top quintile according to one rater and bottom quintile by another. This inconsistency isn't a bug—it's a feature that sustains demand for an ever-expanding universe of ESG products, services, and expertise.
Frameworks like the EU's Sustainable Finance Disclosure Regulation (SFDR) and metrics like Principal Adverse Impact (PAI) indicators, while well-intentioned, have created a byzantine bureaucracy that rewards compliance rather than impact. Companies now spend millions on ESG reporting and verification, creating a thriving industry of consultants who help navigate these requirements with minimal disruption to business-as-usual operations.
As PwC warned in 2023, we're witnessing "the rise of ESG fraud," with companies increasingly tempted to manipulate or misrepresent their ESG credentials for financial gain.
Masking Real Impact
Perhaps the most damaging aspect of current ESG frameworks is how they systematically obscure historical harms and ongoing exploitation through point-in-time assessments.
ESG metrics function like a snapshot—they capture a company's current policies and disclosures without accounting for the historical context of how wealth and power were accumulated. A mining company can receive top ESG marks for its current operations while building on decades of environmental degradation and community displacement.
Can a simple carbon emissions score really tell us everything about a company's climate impact? It's like trying to understand a person's health by only measuring their weight. Yes, it's a data point, but it's far from the whole story.
This reductionist approach creates a dangerous illusion of progress while masking the fundamental unsustainability of many business models that score well on ESG metrics.
Voices from the Margins
Those most affected by corporate activity—indigenous communities, workers in global supply chains, frontline environmental justice communities—are notably absent from ESG frameworks.
"The metrics that matter most to us don't appear in ESG reports," explains a community leader from a region impacted by mining operations. "Our sacred sites, our water quality, our ability to maintain cultural practices—these don't translate into tidy data points."
Workers in global supply chains similarly report that ESG assessments rarely capture their lived experiences. "Companies get high scores for having policies against forced labor," notes a labor organizer in Southeast Asia, "but we still face impossible production quotas and intimidation when we try to organize."
These testimonials underscore a fundamental problem: ESG frameworks are designed by and for financial markets, not the communities most affected by business activities.
Crisis Point
The failure of ESG isn't merely a technical shortcoming—it's an active enabler of harm. By providing a veneer of sustainability to fundamentally unsustainable practices, the current ESG paradigm:
- Misdirects capital that could fund genuine solutions
- Provides false reassurance to consumers and investors
- Delays necessary regulatory interventions
- Obscures the need for systemic change
We've reached a crisis point where ESG, as currently practiced, may be doing more harm than good by creating the illusion of progress while business-as-usual continues. As Elon Musk observed, highlighting the "$35 trillion industry confusion" around ESG ratings.
The path forward requires more than incremental improvements to existing frameworks. We need a fundamental rethinking of how we assess corporate impact—one that embraces complexity rather than reducing it to simplified metrics, acknowledges historical context, centers affected communities, and drives genuine systemic change.
In our next post, we'll explore how ignoring the past has fundamentally crippled our ability to create meaningful accountability in the present—and what we can do about it.