Despite some recent pushback, ESG investing is at a record high.  It’s now time to create the global structures needed to support the next stage of its development.

If you have any connection to the world of corporate business, you’ll no doubt have heard the term ‘ESG’.  The increasing prominence of this acronym (which refers to environmental, social and governance) is illustrated in research by Bloomberg Intelligence’s 2023 ESG Market Navigator survey, which shows that 85% of investors and companies plan to boost ESG investment over the next five years.[1]

As explored in my previous Spotlight article on ESG investing, the basic idea is simple.  Rather than simply considering financial returns, ESG investors also consider the impact of their choices in terms of the environment, society and corporate governance.  In these three key areas, they aim to avoid contributing to damaging outcomes, and ultimately become a force for good.

The Bloomberg Intelligence survey findings align with other similar research.  An asset and wealth management (AWM) report[2] in 2022 from PwC highlighted a similar surge in demand for ESG investments, stating that ESG-related assets under management were set to grow globally at a much faster pace than the AWM market as a whole”– to US$ 33.9 trillion by 2026, from US$ 18.4 trillion in 2021.

Origins and growth of ESG

It seems clear that ESG investment is a force of growing significance in the global economy.  But what does it mean in practice?

Considering the impact of investments beyond narrow financial criteria isn’t a new idea.  ESG’s roots go back at least as far as the 1960s, when amid prominent political protests and campaigns, some investors sought to make more socially responsible decisions.  This included those who avoided investments in certain industries (such as tobacco production) or associated with particular governments (such as South Africa’s apartheid regime).

There were, of course, much earlier attempts to ensure that investments were ethically or religiously appropriate.  But modern ESG principles first began to be formalized in the early 21st Century, with the support of the United Nations (UN).  A 2005 report from the UN Global Compact argued that in an increasingly complex and interconnected world, new challenges were emerging around “actively managing risks and opportunities related to emerging environmental and social trends, in combination with rising public expectations for better accountability and corporate governance” [3].

The document, developed in consultation with 18 financial institutions from nine countries, highlighted the importance of these issues both for companies and investment portfolios, and made recommendations for the financial industry to better integrate ESG principles.  These included a call for investors to “explicitly request and reward research that includes environmental, social and governance aspects”, and to reward companies that were managed well.

Since then, ESG investment has grown substantially, and now forms a significant share of the overall market.  A report from the Global Sustainable Investment Alliance found that in 2022, US$ 30.3 trillion was invested globally in assets that follow ESG principles.  Across Europe, Canada, Australia and New Zealand, and Japan, sustainable investing assets totaled US$ 21.9 billion, representing 38% of total managed assets[4].

These investment trends support greater consideration of ESG principles across the corporate world as a whole.  A 2022 review from McKinsey[5] confirmed that organizations across different industries, geographies, and company sizes have been allocating more resources toward improving ESG.  More than 90% of companies in the Standard & Poor’s 500 Index now publish ESG reports in some form, it pointed out, and about 70% of those in the Russell 1000 Index.  These figures are likely to have risen further still in the period since the report was published.

Looking at the individual strands of ESG practices, McKinsey says the environmental element may include consideration of climate change, air pollution and waste management.  The social dimension, meanwhile, could address factors such as labor practices or health and safety.  And the governance strand could incorporate themes such as business ethics and supply chain management, as well as organizational decision-making structures.

Reasons behind the change

So, what is really behind the growing focus on ESG?  JP Morgan Asset Management highlights government policy as an important driver[6] – pointing, for example, to the impact of the 2015 Paris Agreement and its objective to limit global warming to within 2oC of pre-industrial levels, preferably to 1.5oC.  In line with this, more than 70 countries have now set ambitious targets for reducing emissions.  Meeting these goals will require a range of policy measures such as new funding initiatives, regulations and taxes.  Governments are increasingly introducing mandatory ESG reporting requirements and corporate strategies are responding to the rapidly evolving policy context.

According to JP Morgan’s analysis, changing public attitudes are also impacting corporate actions.  The trend for consumers “voting with their wallets”, in line with the values they want to see, creates a bottom-up incentive for companies to take action.  At the same time, increased public scrutiny of governments in relation to ESG puts pressure on them to apply top-down measures.  This situation creates compelling opportunities for investors to back companies that have responded to ESG concerns, say analysts.

This includes social and governance considerations as well as environmental sustainability.  Social movements such have increased the prominence of social justice concerns, as have some ongoing global economic trends.  JP Morgan argues that many years of low wage growth, plus the COVID-19 pandemic, have focused attention on workforce issues.  And as specialist ESG investment firm ADEC Innovations points out, as supply chains become more complex, there is greater awareness of the social, labor, and human rights risks these create for business[7].  One feature of this new landscape is an increasing corporate focus on diversity and inclusion, as evidenced in the significant rise in the use of these terms in quarterly earnings calls between large companies, investors and analysts.

ESG issues are increasingly becoming a legislative and regulatory matter, too. Modern slavery laws in the UK, US, Canada and Australia among others, for example, require businesses over a certain size to report on what they are doing to ensure that modern slavery and human trafficking is not taking place in either their business or, crucially, their supply chains, which sits firmly under the ‘S’ for social, in ESG.

It is not only a ‘desire to do good’ that is driving ESG activity.  There are strong financial reasons, too.  There is plenty of evidence that ESG investments perform at least as well as others, if not better.  A study in 2023 by Kroll[8], which analyzed data from more than 13,000 companies, found that those with stronger ESG credentials also delivered better financial returns.  Firms categorized as “leaders” in ESG saw annual returns of 12.9%, compared to 8.6% for “laggards” – representing a performance premium of around 50%.  This follows a study in 2021, which examined more than 1,000 research papers published over the previous five years.  Researchers found that 59% of the relevant studies showed similar or better performance from ESG investments compared to standard approaches, with only 14% finding negative results.

So, consideration of ESG can have a positive impact on companies’ profits, reputation and resilience, as well as being good for the planet and society.

In this light, rather than seeing ESG as a distraction from good business, the increasing consensus has been – and must continue to be – towards integrating it into mainstream thinking and practice.  This approach was endorsed in a January 2020 letter to chief executives from Larry Fink, head of the US investment firm Blackrock.  Focusing particularly on environmental sustainability, Fink argued that the increasing significance of climate change risks meant “we are on the edge of a fundamental reshaping of finance”[9].

In his assertion that “climate risk is investment risk”, Fink explicitly aligned ESG concerns with best business practice.  He reiterated his view that “purpose is the engine of long-term profitability” and warned that Blackrock would be increasingly disinclined to back the management of companies that were not making sufficient progress on sustainability.


Yet the more ESG enters the mainstream, the more scrutiny it faces.  Some experts suggest the momentum behind the concept may have slowed and that skepticism is growing.  Richard Stone, chief executive of the UK-based Association of Investment Companies (AIC), for example, said the organization’s research “suggests that 2021 may have been a high point for enthusiasm about ESG investing”, with their research suggesting the proportion of private investors considering ESG factors has fallen over the past two years[10].

In 2021, almost two thirds (65%) of those surveyed said they gave thought to ESG factors when investing.  The next year, this had fallen to 60%, and in 2023, it dropped further to 53%.

Among the 47% who did not think about ESG factors, the top reason given was prioritizing performance over ESG issues, with “not being convinced by ESG claims from asset managers” coming close behind.

The survey also found concerns about ‘greenwashing’ – meaning exaggerated or misleading claims made about supposedly sustainable practices.  In the AIC survey, 63% of respondents said they were concerned about greenwashing.  The proportion of investors agreeing with the statement that “I’m not convinced by ESG claims from funds” has grown – from below half (48%) in 2021 to almost two thirds (63%) in 2023.

Recent high-profile accusations of corporate greenwashing may well have helped bring this issue to the forefront of investors’ minds.  In 2023, for example, the campaign group Global Witness filed a complaint against the oil giant Shell with the Securities and Exchange Commission in the US, claiming the company had misled investors.  Global Witness said that while Shell claimed to spend 12% of its annual expenditure on renewables and energy solutions, its analysis found that the company only allocated 1.5% of its overall spending towards solar and wind power generation.

In the UK, regulators have found a number of energy companies guilty of greenwashing.  Shell was one of three fossil fuel businesses whose campaigns were banned in June 2023 by the Advertising Standards Authority for misleading the public about their products’ environmental benefits[11].  It isn’t just oil and gas firms facing criticism.  The UK’s Competition and Markets Authority (CMA) announced in December 2023 that it would be investigating Unilever – which makes a wide range of consumer goods – over concerns it was making misleading sustainability claims, as part of a wider investigation into greenwashing.  The CMA’s chief executive Sarah Cardell said the watchdog was “worried many are being misled by so-called ‘green’ products that aren’t what they seem”.

Green window dressing

There are also concerns that some investment funds may have engaged in greenwashing-style practices.  In a recent blog for the Centre for Economic Policy Research (CEPR)[12], academics from France’s EDEHC business school argued that there is evidence that “fund managers may game regulatory disclosure to disguise themselves as sustainable, while including higher performing yet controversial assets in their portfolios”.

The researchers point out that while sustainability ratings provided by industry analysts have increased transparency, they are calculated based on disclosures from funds which only have to be made a few times a year.  This leaves it open for unscrupulous managers to strategically purchase ESG stocks just before disclosure to increase their sustainability ratings, before shifting back to higher yielding yet less responsible assets when detection is unlikely.

Worryingly, the researchers found evidence to suggest this was indeed happening in some cases, by comparing the performance of ESG funds against major ESG stock indexes.  The analysis found that correlation between these drops significantly right after mandated disclosure, when there was also a sudden increase in correlation with the performance of high-emission stocks.  Based on these findings, the academics conclude that “some funds engage in green window dressing”.

The findings come amid ongoing confusion over how ESG funds are classified – an issue that has been particularly prominent in Europe.

In July 2022, the European Commission (EC) issued new guidance on sustainable investment funds, prompting hundreds of funds to have their sustainability status downgraded from the top-rated ‘article nine’ (where there must be an explicit sustainable investment objective) to the less stringent ‘article eight’ category.  According to data from Morningstar, in the fourth quarter of 2022 funds holding a total of US$ 193 billion were downgraded from article nine classification following the EC’s intervention[13].  In light of further clarification from the EC in April 2023, some 35 funds were upgraded back to article nine, but the numbers remain far below the previous mark.


Alongside this confusion, the concept of ESG itself has come under political attack, particularly in the US.  In Florida, laws were passed that ban the consideration of ESG factors in state and local government investment decisions, stating that these must be based solely on “pecuniary factors”[14].  This follows laws that limit the use of ESG in a number of other states, as the idea has become embroiled in cultural disputes.  Florida’s governor Ron DeSantis has accused corporations of injecting “an ideological agenda through our economy rather than through the ballot box,” and said the state’s new laws would “reinforce that ESG considerations will not be tolerated here in Florida”.  This followed similar criticism of ESG from Mike Pence, the former US vice president, who wrote that the concept “empowers an unelected cabal of bureaucrats, regulators and activist investors” to impose their own political values.[15]

Whatever one’s own views, it is clear that ESG has become an increasingly politicized term – and that this has made some investors more wary of using it.  Blackrock’s Larry Fink, for example, previously a vocal supporter of the ESG approach, announced he had stopped using the phrase, which he said had been “weaponized”.  Although he said his firm had not changed its stance on ESG issues and would continue to support goals such as decarbonization in the companies it invests in.

Rhetoric and reality

Given the various political and regulatory headwinds faced by ESG, it’s hardly surprising that there are growing questions about the idea.  But in my opinion, the increasing criticism that ESG is facing is an inevitable reaction to it reaching maturity, and ultimately a positive sign.

If the concept is sound, after all, it should be able to withstand robust scrutiny.  That scrutiny will inevitably result in some less valid ESG claims being exposed and bring unfortunate cases of greenwashing to wider attention.  But I firmly believe it also means we can have greater faith in the investments and initiatives that hold up to the increased attention.

Greater transparency and rigor will be important to moving forward with ESG investment.  So, I find it encouraging that this year the International Auditing and Assurance Standards Board announced proposals to develop new global assurance standards for sustainability reporting[16] – with supporters of this idea including Norway’s sovereign wealth fund.  This move forms part of ongoing efforts around the world to tighten the regulation surrounding ESG investment[17].  While in the short term this may well cause some difficulties, it should ultimately lead to greater clarity and confidence.

We’ve seen in recent years how ESG investment has sometimes been the subject of rather excessive claims, whether it is being portrayed as a positive or nefarious force.  But in my experience, successful investors can be identified by their ability to see the reality behind the rhetoric.  And anyone who examines the current situation honestly can see that the environmental, social and governance challenges that that global economy faces are very much real.  That’s why ESG investment looks certain to form an integral part of our financial future.  It’s down to us all to make sure that it does so with the greatest possible success.