Author’s Note: This is the first in a three-part series on Environmental, Social and Governance (ESG) investing.

Environmental, Social, and Governance (ESG) investing emerged as a purportedly transformative force in the financial world, growing at a breakneck pace until very recently. It promised a pathway to align the often-disparate goals of generating superior financial returns with achieving broader environmental and social objectives. This burgeoning asset category, encompassing a wide and evolving array of factors—from a company’s carbon emissions targets and waste management practices to its labor relations, supply chain ethics, diversity initiatives, and the integrity of its corporate governance— influenced investment decisions and corporate strategies across the globe. ESG was framed as a way to reshape how capital flowed and how businesses operated, driven by investors’ desire for a more sustainable and equitable future.

But that future has hit an iceberg. July 2025 marks a turning point, as the passage of the One Big Beautiful Bill (OBBB) just wiped out crucial tax credits for green tech and sustainable infrastructure projects. Even before the ink was dry on the OBBB, the writing was on the wall. Major investment powerhouses like BlackRock, once vocal proponents of ESG integration, have all but killed their explicit ESG advocacy and rebranded their social investment business lines.

Given this undeniable contraction and the shifting winds of political discourse, a critical examination of ESG is urgently needed. What were its successes? Where did its aspirations fall short? And what insights did its critics genuinely possess, or overlook? 

In addition to answering these questions, this series of posts aims to move beyond the superficial criticism that characterizes much of the public discourse on ESG. Instead, it seeks to offer a deeper, more fundamental critique. While acknowledging some conventional arguments against (and even a few perceived benefits), we will demonstrate how ESG ultimately falls short of addressing its stated objectives. It will also reveal how ESG reinforces the contradictions inherent in capitalism and thereby impedes genuine environmental, social and economic progress.

A Brief History of ESG

ESG investing has a longer history than you might imagine, evolving from niche ethical considerations to a mainstream, albeit politically charged, financial force. The roots of ESG can be traced back much further than its modern coining. The more recognizable precursor, Socially Responsible Investing (SRI), gained prominence in the 1960s and 1970s. This era saw investors, often motivated by moral or ethical concerns, using negative screening to avoid companies involved in industries like tobacco, alcohol, gambling, or those supporting apartheid in South Africa or the Vietnam War. SRI was largely about aligning investments with personal values and “doing no harm.” (The author recalls investing in an SRI fund when he got his first job out of college in 2002. He wasn’t particularly impressed with the selection methodology, but it was the only fund available that did any ethical screening whatsoever.)

The term “ESG” itself gained mainstream traction in 2004 with the publication of the Who Cares Wins report by the UN Global Compact, alongside financial institutions. This report highlighted how integrating ESG factors into investment analysis could lead to better long-term financial performance, shifting the conversation from purely ethical avoidance to material financial risk and opportunity. The period afterwards saw significant developments including the launch of a UN-backed initiative providing a framework for institutional investors, increased data and frameworks, creating standardized reporting frameworks that allowed investors to better assess non-financial risks and opportunities, and a shift to actively integrating ESG factors into fundamental financial analysis. Major events like the 2008 financial crisis and increasing awareness of climate change further highlighted the risks that ESG aimed to address.

In the late 2010s to early 2020s, ESG investing experienced exponential growth. Assets under management (AUM) flowing into ESG-labeled funds soared into the trillions globally, reaching what some consider its peak in terms of public enthusiasm and inflows around 2021-2023. 

As ESG grew, however, it was met with fiery criticism, sparking a deeply polarized debate characterized by both advocacy and fierce opposition. The anti-ESG movement was birthed in a political environment marked by escalating polarization over many three–letter acronyms. While ESG funds experienced a significant surge in interest, this period of heightened enthusiasm, described as a hype bubble, has since encountered economic headwinds, ambiguities regarding its true objectives, and legitimate concerns of greenwashing. After the fallout from the 2024 election, many investment firms and corporate giants began to walk back their environmental and social commitments, all but validating skepticism over their sincerity.

The Appeal of ESG: Where It Appears to Succeed

Before delving into popular critiques of ESG, however, it is important to acknowledge the perceived benefits and motivations that drive ESG adoption, demonstrating a nuanced understanding of its appeal within the existing economic paradigm. While we won’t cover all of the arguments in favor, three are three key positions that are perhaps the most persuasive among them:

• Lowering the Cost of Capital and Facilitating Fundraising: A primary argument in favor of ESG is its potential to make capital cheaper and easier to access for firms perceived as “green” or otherwise “virtuous.” The effect may be weak, but ESG investment can help lower the cost of capital, making these firms more competitive and facilitating easier fundraising through bond or new stock issuance, potentially leading to lower interest rates on debt. Academic research supports this, with studies finding a positive correlation between high ESG scores and financial performance, including a lower cost of capital. Effective ESG strategies, particularly when integrated with strong corporate governance, can enhance a company’s financial performance and attract capital.
• Risk Mitigation: ESG can provide a tangible financial incentive for companies to adopt certain practices, as investors increasingly view ESG factors as indicators of sound management and reduced risk, especially over longer time horizons or during periods of crisis.  Companies with strong ESG performance tend to be less susceptible to regulatory penalties due to environmental non-compliance, costly lawsuits stemming from labor abuses, or devastating reputational damage from ethical lapses. They often possess more robust supply chains and better relationships with stakeholders, which can contribute to stability. However, lower volatility and enhanced downside protection naturally leads to the implication that these lower-risk assets might also yield lower expected returns. If companies with strong ESG credentials are indeed more stable, less prone to major controversies, and better managed, their stock prices might exhibit less fluctuation and their earnings might be more predictable. This reduced uncertainty means they have a lower “beta” – they are less sensitive to overall market movements. According to the Capital Asset Pricing Model (CAPM), a lower beta corresponds to a lower required rate of return for investors, as they are taking on less systematic risk. 
• A Moral Stance: Beyond the financial incentives, a compelling moral argument is often put forth by ESG investors: that by directing their capital towards “virtuous” firms, they are at least not participating in ethically questionable profit-making activities. This perspective offers individuals a sense of agency and moral alignment within a complex economic system, allowing them to feel that their investment choices reflect their values. For many, the appeal of ESG lies precisely in this promise of “doing good while doing well.” It provides a means to express personal ethical preferences through financial decisions, offering a sense of having contributed to a better world, even if only in a small way.  

To summarize, ESG may help lower the cost of capital for companies that meet the criteria potentially giving those firms a competitive advantage. It may also provide reduced risk exposure for investors over long time horizons at the potential expense of future returns, while offering investors the opportunity to invest according to their values. In a future post, we’ll explore some of the discourse against ESG, both in the popular zeitgeist and from the more serious academic perspective. In the final post, we’ll develop critiques that go beyond conventional narratives and provide policy and economic solutions that may prove more effective than ESG ever could.

Stay tuned!