Debates Around ESG Adoption

Since 2023, I’ve been circling around the same question: is ESG just another management fashion that will eventually fade like Blue Ocean Strategy, or is it part of a deeper shift where sustainability genuinely reshapes how businesses and their clients behave? Back then, my answer was that ESG as a label might be temporary, but sustainability as a goal is not a luxury - it is a necessity, because we already know resources are limited and future generations will inherit debt, emissions, and broken systems we leave behind. Over the past two years, however, the landscape has shifted dramatically. The political backlash in several leading economies and the wave of greenwashing scandals have made the term ESG feel more fragile and contested. But this is not a moment to abandon the idea. Instead, it is a necessary phase in which the fashion gets tested and the underlying structure either strengthens or collapses. If we don’t want the next generation to carry both fiscal and ecological generational debt, then the energy transition and more labor-friendly systems are not optional. What has become clearer is that the adoption of ESG is shaped by both demand-side and supply-side forces, and understanding this dynamic helps explain why the system looks unstable today (Abrahamson & Fairchild, 1999). On the demand side, companies are increasingly confronted with operational risks from climate change, supply chain disruptions, labor issues, and shifting consumer preferences. Asset owners and investors also demand more information about sustainability risks as they face long-term portfolio horizons. Meanwhile, consumers - especially younger generations - expect businesses to reflect environmental and social values. These pressures create the market force that encourages firms to adopt ESG frameworks. On the supply side, however, the ESG ecosystem is heavily shaped by consulting firms, rating agencies, data vendors, and even business schools, all producing frameworks and narratives that define what 'good' ESG performance should look like. Yet, this same intersection is where many of today’s problems originate. Research continues to remind us that ESG cannot be reduced to a compliance checklist. Ignoring material environmental or social issues, or handling them poorly, creates real risks - including security threats, supply chain disruptions, reputational damage, and even financial instability (Dolan & Zalles, 2022). This undermines the credibility of ESG and contributes to the greenwashing scandals that have fueled skepticism. In other words, the ESG adoption problem is not simply that companies are unwilling - it is that the surrounding system is uneven, fragmented, and often shaped more by incentives than by actual impact. This instability is exactly why the debate around ESG feels chaotic, and why clearer rules, better data, and a more aligned understanding of sustainability are becoming urgent.

Ratings and evidence

Confusion arises from the multiple and overlapping definitions of ESG, CSR, and sustainability. Reputational providers like MSCI, S&P, and Moody’s may each have roughly 65 data buckets, but the specific data points, sources, and weighting schemes differ substantially. The same company can have a strong score under one system and a weak score under another (Dolan & Zalles, 2022). After mergers between credit-rating agencies and ESG-rating firms, researchers have also found incentives to please fee-paying clients on the credit side by inflating their ESG scores. This completely undermines the idea that ratings are neutral signals of sustainability performance rather than another customer-service product (Li, Lou, & Zhang, 2024). This is how greenwashing becomes institutionalized - it’s not just one company exaggerating in a glossy report, but structural loopholes in the way data and ratings are designed, sold, and interpreted.

At the same time, the literature points out clearly that ESG investing is not primarily a fairytale about 'saving the world' (Pucker & King, 2022). At its core, ESG is about how environmental and social changes affect profitability, risk, and the cost of capital. Even though there is no universal proof that ESG always delivers excess returns, there is evidence that it can improve risk-adjusted outcomes and slow the speed at which we are heading into climate and social crises (Pucker & King, 2022).

For example:

• A long-short strategy that buys carbon-efficient firms and shorts carbon-inefficient ones historically earned about 3.5%–5.4% abnormal returns per year (In, Park, & Monk, 2019).
• The FTSE Green Solutions Index outperformed the FTSE Global All Cap by 4.9% annualized from 2015–2020 (NYU Stern & Rockefeller AM, 2021).
• ESG improver portfolios outperformed decliners by 3.8% per year (2010–2020).
• During the COVID-19 shock, 24 of 26 ESG index funds outperformed their counterparts, and nearly half remained ahead by Q3 2020 (NYU Stern & Rockefeller AM, 2021).

These numbers don’t indicate that ESG is magic, but they suggest that ignoring ESG-linked risks is increasingly irrational from a financial point of view. This shifts the debate from is ESG good or bad?' to 'which indicators are material, which data is credible, and how do we distinguish real shifts from corporate storytelling?'

Transformative standards

On the action side, we began thinking more in terms of 'transformative investment' and systems change rather than scores and rankings (Schot et al., 2022). A story that stayed with me is from SECRID, a wallet company founded by two designers who had worked in traditional factories. They explained that while the first industrial revolution in the Netherlands was about productivity and efficiency, the modern era is about resilience. This reflects a shift in infrastructure, consumer consciousness, and in the way companies talk about materials, circularity, and long-term wellbeing. If societal values are shifting at that deeper level, then frameworks, standards, and investment practices must evolve alongside them. Schot et al. (2022) describe this through the lens of 'deep transitions' - the move from a fossil-intensive socio-technical system toward a sustainable one, supported by long-term vision, experimentation, and patient capital. Similarly, GRI standards are becoming more refined, with universal standards (GRI 1, 2, 3) and now sector-specific standards providing more tailored guidance. These efforts help reduce fragmentation and provide a shared language across industries. Actor alliances like ICCR are also playing a larger role. Through shareholder engagement on labor rights, climate risk, supply chains, and corporate political accountability, they continue pushing companies even in politically polarized environments (Wokaty, 2023). We can acknowledge that ESG as a marketing term has been abused, that inconsistent standards have damaged credibility, and that political backlash is real. But it is also clear that when sustainability indicators are carefully designed and standards converge, sustainable investing becomes less about branding and more about risk management, resilience, and long-term value creation. In conclusion, sustainability investing is no longer a luxury add-on; it is now part of how we understand long-term value. ESG will not disappear as a label, but building clearer rules, more transparent data, and stronger alignment between investor expectations and actual capital flows is essential.

References

Abrahamson, E., & Fairchild, G. (1999). Management fashion: Lifecycles, triggers, and collective behavior. Administrative Science Quarterly, 44.

Dolan, C., & Zalles, D. B. (2022). Transparency in ESG and the Circular Economy.

In, S. Y., Park, K. Y., & Monk, A. (2019). Is “Being Green” Rewarded in the Market?

Li, X., Lou, Y., & Zhang, L. (2024). Do commercial ties influence ESG ratings? Evidence from Moody’s and S&P. Journal of Accounting Research, 62(5), 1901–1940.

NYU Stern & Rockefeller AM. (2021). ESG and Financial Performance.

Pucker, K. P., & King, A. (2022). ESG investing isn’t designed to save the planet. Harvard Business Review.

Schot, J., Keesman, S., & Steinmuller, E. (2022). Transformative Investment in Sustainability.

Wokaty, J. (2023). ICCR’s 2022–2023 Annual Report.