Why ESG Failed, and What's Next for the Sustainability Movement?

Environmental, Social, and Governance (ESG) investments have recently emerged as one of the hottest trends in the financial sector. That being said, this progressive movement is facing more and more criticism, as time goes on. Prominent media outlets like CNN and Yahoo Finance are increasingly exploring the fall of ESG.

The ESG movement had originally been driven by noble intentions and a compelling promise: investing to generate a positive impact on earth, a.k.a. sustainable investing. Since the introduction of the ESG concept in 2005 and up until recently, many companies have got on board and started reporting on their progress in this area. Indeed, more than 90% of S&P 500 companies (index components) now publish reports detailing their ESG efforts alongside their financial disclosures.

Unfortunately, various organizations and special interest groups have exploited this trend to serve their own agendas, giving rise to the practice of greenwashing.

So, what's next for ESG, and how can investors navigate this confusing landscape? A close analysis of the ESG phenomenon should shed some more light.

The main drawbacks of the ESG movement

1. Greenwashing

As mentioned above, some companies try to score “ESG points” without being genuinely committed but rather as a means to whitewash their image and gain pseudo-endorsements. A Harvard study found that approximately 72% of social media posts by oil and gas companies use deceptive greenwashing tactics to create the illusion of environmental awareness, even though these very companies continue to rank among the largest polluters and contributors to global warming.

This less-than-ideal reality of ESG investments is also described in a report by Brown University, which exposes how energy companies are pouring an eye-opening USD 3.6 billion into reputation-building “green” advertisements.

2. Shifting the focus away from actual innovation

While ESG has been created with a noble aim in mind, it is now fostering a false sense of progress. Evolution demands a rapid embrace of the unknown, the unfamiliar, often requiring one to opt for the uncharted over the well-trodden and convenient paths. What the world genuinely needs are bold innovators committed to reversing climate change and not merely reducing it.

ESG fosters the opposite. A 2023 Harvard study revealed a sobering truth: when comparing a fund labeled as “green” to a conventional investment fund, “green” stocks constituted a mere 32% of the fund, leaving the remaining 68% “the exact same” as a regular fund. This means that for every franc you invest in such funds, more than two-thirds are allocated to companies that could have been included in a non-ESG fund.

3. Lack of standardized metrics to measure ESG performance

ESG factors encompass a wide range of qualitative and quantitative indicators that capture a company’s environmental, social, and governance performance. Many of these factors, however, are extremely hard to measure, potentially leading to the loss of important information that neither neatly fits into evaluation grids nor can easily be quantified.

How does one precisely determine employee satisfaction, human rights practices, social impact, and similar? Even if a company has received recognition in one of these areas – does that really signify an authentic commitment to the sustainable movement?

The absence of standardized metrics, therefore, makes it difficult, if not impossible, to compare and benchmark performance across companies and industries.

Where should conscious investors turn to?

Investors should re-evaluate both their investments and their attitudes toward certain companies that are insistently claiming to be committed to ESG principles. In essence, we all need to become more responsible in the way we use the term “sustainable investing.”

Adopting this approach will transform the ESG movement, leading it toward a new and significantly more effective trajectory. The sustainability label should exclusively be reserved for investments that exhibit tangible, positive effects in the real world.

Accordingly, investors who are truly committed to making a difference should exercise more discern when choosing which companies to invest in, focusing on companies — whether public or private — that pursue strategies that can impact problems directly and undo ecological damage rather than merely reducing it. This could involve initiatives such as combating harmful pollutants, reversing climate change, or convincing governments to impose even stricter ecological regulations.

Conclusion

The ESG concept initially involved a bright path and an ambitious goal, but the persistent phenomenon of portfolio greenwashing has alienated many investors. This poses a threat to our collective awareness of the necessity to safeguard Mother Earth – a fundamental truth that we cannot afford to ignore.

According to estimates by McKinsey & Company, achieving the net-zero transition for energy and land-use systems in alignment with the 2050 Paris Agreement objective demands a notable upsurge in investments in physical assets. The capital needs were initially estimated at USD 9.2 trillion per year and now require a substantial annual increase of USD 3.5 trillion — an amount that goes far beyond the capacities of public markets and will heavily rely on private sector financing.

At Moonshot, we largely contribute to this movement while making sure that the concept of “sustainability” doesn’t become blurred. We have the conviction that if each of us engages with the sustainability movement in the right way, a brighter and greener tomorrow will be well within our grasp.

Drawing on the wisdom of Prof. Dr. Erich Fischer, a highly cited scientist and lecturer at ETH Zurich, “Take climate change seriously, but also see it as an opportunity.”

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