Is ESG Part of the Solution or the Problem?

Written by: Ethan Brown

Edited by: Louis Chenot

ESG (Environmental, Social, and Governance) practices have faced a range of political opposition in the past year, especially in the United States, where the government has rolled back key aspects of this initiative. Nonetheless, the environmental problems at the root of ESG remain, even as resistance to change increases. Several important questions remain: will ESG stick, and does its framework make actual progress in solving the environmental problems of our time?

What is ESG?

In short, ESG refers to the criteria used to evaluate a company’s efficiency beyond simply its finances. Central to this framework is sustainability. One component of this involves examining how the company interacts with the natural environment. However, ESG also encompasses how social issues are addressed and what structures are in place to ensure ethical behaviour. While socially responsible investment has a long history, it was not until the 1990s and the 2000s that ESG investing as we know it became mainstream. The idea that a company can maximize profits while addressing sustainability was adopted by many business leaders. Oftentimes, investors will factor ESG scores into their decisions to invest in a particular company (Conmy, 2024). Likewise, the ‘E’ part of ESG could involve firms taking into account environmental factors, like carbon emissions, when evaluating suppliers. The social aspect of ESG can also be wide-ranging, ranging from labor rights to diversity to data privacy. Governance refers to the internal ethics and culture of the leadership. An overwhelming 90% of corporations within the S&P 500 publish ESG reports, reflecting the demand for action in these domains.

Does ESG actually address climate issues?

Firstly, ESG is a framework that takes a market-based approach to mitigating climate change impacts. It aims to balance profits with sustainable business. Firms publish ESG reports, pledging to change and evolve based on that guidance. There are numerous examples of this transition from climate change ignorance to environmental stewardship. However, it is worth noting that the private sector is the largest polluter both historically and currently. Recently, many corporations have committed to net-zero carbon targets but remain responsible for continually increasing emissions (Wright & Nyberg, 2024). Despite a commitment to ESG, high-polluting sectors, such as energy, finance, and technology, have experienced lax regulation by many governments due to their political influence. Greenwashing is also a major issue related to ESG reporting. In the context of ESG disclosure, this refers to when firms manipulate data to falsely present themselves as environmentally responsible. A prime example of this is the story of the Deutsche Bank-owned asset management firm DWS. They were investigated in 2021 by the U.S. Securities and Exchange Commission and were fined €25mn by German prosecutors for making false claims about the size of their ESG assets (Storbeck & Müller, 2025). Importantly, this reveals how the ESG framework itself can be manipulated.

Nonetheless, evidence suggests that ESG generally leads to real progress in mitigating climate change. Promoting climate-conscious personnel to the highest echelons of leadership can help change the direction of the private sector for the better (Wright and Nyberg, 2024). Furthermore, ESG can raise public concerns for corporate accountability by publishing data online. Research shows strong correlations between ESG metrics and tangible environmental sustainability in terms of reducing carbon emissions by adopting renewable energy, climate-friendly transportation, amongst other measures (Adhana & Rashmi, 2023). This is especially true for the small and medium-sized businesses the research focused on. High scores in the other elements of ESG – social and governance – were also correlated with increased environmental sustainability. More research supports the idea that firms generally become more engaged in addressing environmental issues, oftentimes through ESG, as climate change intensifies with extreme weather deviations (Xue et al., 2025). This is the scenario we find ourselves in now, with global warming affecting both profits and well-being.

ESG should be only one piece of the puzzle towards a greater push to halt environmental degradation, which threatens both people and profits. Still, ESG is important to entice companies to make environmental and human concerns a factor in their business decisions.

What’s going on with ESG now?

In recent years, ESG regulation and investment have grown substantially, particularly in Europe and North America. About US$30-40 trillion in assets considered to be ESG are under management globally (Parrish, 2024). At the same time, a backlash to this framework has erupted, particularly in the United States. Many state pensions are backtracking from ESG investment (Cifrino, 2024). Anti-ESG bills have been passed in some states, such as Florida, to prohibit state fund managers from considering ESG factors. Meanwhile, other states have passed laws to require public fund managers to consider ESG factors or to mandate divestment from fossil fuel companies. This stark divide is also evident in the different approaches taken to ESG by the Trump and the Biden administrations. Ultimately, this creates uncertainty for businesses and can slow the growth of ESG practices that aim to combine business and environmental objectives.

Still, ESG will most likely continue to expand and evolve in response to its legitimate and illegitimate criticisms. ESG has notable weaknesses – greenwashing is a real concern, and there are instances where market forces fail to protect the environment, no matter the degree of ESG. For instance, only governments can designate national parks to protect valuable land from degradation.

Nonetheless, what criticism of ESG from a fiscally conservative position often misses is that ESG makes financial sense. Evidence suggests that satisfactory ESG performance creates more, not less, shareholder value in the long run through sustainability.

Going forward, specifically in the U.S., the scope of ESG may narrow and the language surrounding it may become more conservative. Federal and state regulations may also dwindle. Regional divides will solidify. Still, many stakeholders, including corporate leadership, understand the irrefutable case for ESG, which will continue to grow in the U.S. and globally. ESG makes companies more resilient to climate change and allows them to capitalize on new clean technologies. Likewise, companies with robust ESG practices have a favorable brand image that attracts capital, talent, and sales. Despite differing views on advancing environmental sustainability, it is still beneficial for firms to operate under an ESG ideology. They ought to if they have any interest in etching out a positive legacy.

References

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Byrne, D. (2025, January 15). The future of ESG in 2025: a world divided - The Corporate Governance Institute. The Corporate Governance Institute. https://www.thecorporategovernanceinstitute.com/insights/news-analysis/the-future-of-esg-in-2025/

Cifrino, D. (2024, January). The Politicization of ESG Investing. ALI Social Impact Review. https://www.sir.advancedleadership.harvard.edu/articles/politicization-of-esg-investing

Conmy, S. (2024a). A Simple Guide to ESG. The Corporate Governance Institute. https://www.thecorporategovernanceinstitute.com/insights/guides/simple-guide-esg/

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