Image: The New York Times
Like many grand ideas in capitalism, ESG was born out of a crisis and baptised in optimism. It sought to do something markets rarely attempt: solve for planetary survival while turning a profit. The notion that investors could account for environmental, social and governance (ESG) factors without sacrificing returns became a mantra for asset managers, banks and corporate boards. But in 2025 the doctrine looks frayed. The fervour has faded and the politics have soured. The ESG moment may not be over but the ESG illusion almost certainly is.
ESG’s rise was as rapid as it was rhetorical. By 2022 over $35trn in assets were labelled ESG-aligned, according to the Global Sustainable Investment Alliance. BlackRock, the world’s largest asset manager, claimed sustainability was “the new standard for investing”. Banks published glossy net-zero roadmaps. A new priesthood of ESG analysts and consultants emerged, armed with heat maps and scorecards. The idea was seductive: that capitalism could be calibrated to internalise long-term risks—climate change, labour unrest, boardroom misconduct—without undermining quarterly returns.
But seductive ideas are not always sound ones. The ESG universe has always been a curious hybrid: part risk framework, part moral code, part marketing strategy. It now suffers from all three identities pulling in opposite directions. Investors seeking clarity find obfuscation. Politicians sniffing hypocrisy pounce. And companies once eager to advertise green credentials are quietly rewriting the small print.
The retreats have become conspicuous. UBS has deferred its net-zero emissions goal from 2050 to 2060. Wells Fargo has abandoned it altogether. The Royal Bank of Canada has scrapped its sustainable-finance target. HSBC is rethinking its climate strategy. These are not marginal firms. They are globally systemically important banks, now walking back promises once made with fanfare. In April the Net-Zero Banking Alliance relaxed its emissions rules, citing the “infeasibility” of achieving 1.5°C alignment. Reality, it seems, bites harder than rhetoric.
Much of the trouble stems from conflicting imperatives. European regulators continue to stiffen sustainability requirements. The EU’s Corporate Sustainability Reporting Directive and the European Central Bank’s climate stress tests have raised the bar for ESG disclosures. America, by contrast, has turned hostile. Republican-led states have pulled billions from fund managers they deem “woke”, launched lawsuits against ESG coalitions and passed legislation penalising firms that shun fossil fuels. The SEC has watered down its climate disclosure proposals. Firms with transatlantic footprints find themselves pulled in opposite directions: de-risk in Europe, de-politicise in America.
The discord transcends definitions. ESG ratings agencies assign wildly different scores to the same firms. A mining company might score well on governance and emissions but poorly on human rights. Is it ESG-compliant? The lack of a global standard leaves room for interpretation, and for abuse. The International Sustainability Standards Board (ISSB), charged with harmonising disclosures, recently proposed dropping mandatory Scope 3 emissions reporting for banks, an admission that ESG accounting remains more art than science.
Greenwashing scandals have only deepened mistrust. In 2022 German regulators raided the offices of DWS, Deutsche Bank’s asset-management arm, over allegedly inflated ESG claims. Desiree Fixler, a former executive turned whistleblower, exposed the gulf between public ESG pronouncements and internal metrics. More cases have followed. The illusion of transparency—of scores, standards, ratings—has collapsed under scrutiny.
To critics, the entire ESG enterprise now looks like a neoliberal contrivance: a way to outsource planetary problems to private capital, without imposing the mandates or subsidies that genuine decarbonisation demands. Tariq Fancy, a former CIO at BlackRock, calls ESG investing a “dangerous placebo”, distracting from the need for policy reform. Markets, he argues, will not sacrifice profits for the public good unless compelled.
Yet others argue the pendulum has swung too far the other way. Climate change is both an ethical issue and a financial one. The International Energy Agency estimates without aggressive mitigation, climate-related damages could shave 3% off global GDP by 2050. Allianz, a large insurer, warns of “climate-induced credit shocks” that could cascade across asset classes. For long-horizon investors—pension funds, insurers, sovereign wealth funds—ignoring climate risk is increasingly hard to justify. The Norwegian Sovereign Wealth Fund, with $1.6trn under management, continues to integrate climate metrics into its core investment thesis.
Indeed the divide is as much temporal as ideological. Hedge funds with millisecond trading strategies care little for sea-level projections. But “universal owners”—institutions that hold the entire market, and hold it for decades—cannot avoid systemic risks. Their incentives are aligned not with ideology but with intergenerational stability. For them ESG is a crude attempt to price externalities that markets would otherwise ignore.
This may be the best way to understand the current moment. ESG is not dying. It is maturing, and shedding illusions in the process. The label itself may fade. But the underlying challenge it tried to solve—how to account for long-term, non-linear, global risks in a short-term, linear, national financial system—remains unsolved. Climate risk is not going away. Nor are demographic pressures, governance crises or social upheaval.
A post-ESG world may be one where these factors are treated as part of basic investment analysis rather than separate domains. Already, the savvier investors are moving on from exclusion lists and virtue metrics to demand measurable impact. Shareholder activism is shifting from divestment to direction: asking not if a bank finances oil, but how fast it shifts its loan book towards clean energy. In time ESG may vanish from marketing decks but become embedded in risk models, the way inflation or interest rates are today.
The real test will be whether governments play their part. Voluntary finance alone cannot redirect a $113trn global economy. Pricing carbon, subsidising green tech, enforcing labour laws, these are not things a Bloomberg terminal can do. The era of ESG as a silver bullet is over. What comes next is harder, messier and more political. But perhaps also more real. ■
