What is wrong with ESG? Lights and shadows of an emerging standard

Sustainability criteria have now evolved into a comprehensive framework encompassing environmental, social, and governance (ESG) concepts and practices. The drive towards sustainability is changing consumers’ and investors’ preferences.

Consumers of all ages now demand socially and environmentally responsible products and services and use their purchasing powers to reflect these preferences. Investors have followed suit with meaningful steps to integrate sustainability issues into their investing criteria. In turn, shareholders increasingly hold corporate leaders accountable for their ESG performance. Significantly, these trends are driving innovation; together, they are reshaping industries, including the finance industry in our present context.

However, some express the view that ESG is nothing more than a temporary, seasonal fashion that unscrupulous firms are seizing upon to drive their profits. They point to “greenwashing” as a standard practice, even among reputable companies. Unsurprisingly, ESG issues at the global level are evolving away from a mainly voluntary disclosure-oriented dimension to a regulatory one with significant implications for how ESG information is collected, verified, and acted upon within an organisation. Global regulatory interventions are imposing new requirements for private businesses to report on and prevent adverse impacts on climate, the environment and human rights.

As these global ESG regulations evolve, it is critical for organisations to understand their implications and, critically, to respond to what each may perceive as emerging issues or perceptions. Based on our advisory role to governments and the private sector, we at Whiteshield have spotted six main sets of perceptions:

  • ESG measurability is flawed.
  • ESG is just a “formal”/ trend, not a core dimension for a company.
  • ESG is greenwashing.”
  • ESG dimensions are juxtaposed but not correlated.
  • ESG is fostering inequalities rather than solving them.
  • Consumers are not interested in ESG.

How grounded are the above statements? What can be done to amend frameworks and regulations and improve ESG companies’ approaches if they are? And how do these perceptions impact the overarching ESG objective of a more sustainable future?

ESG measurability is flawed

ESG measurability is flawed concern refers to the fact that ESG misses uniquely defined and often comparable metrics and indicators and is difficult to benchmark, with the risk of bending results to support partial points of view. Among the different metrics, the Environmental dimension is considered easier and more useful to measure and monitor than the Social and Governance dimensions, which are perceived as intangible and hard to measure.

Measurability is indeed a critical point in ESG, and concerns about the wide range of metrics used and the challenges to finding a synthetic indicator are understandable, considering the complexity level around sustainability factors and their implications on society.

However, there are also clear international ESG standard metrics. For example, the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC) or the Sustainability Accounting Standards Board (SASB) provide well-established guidelines on metrics and disclosure to make ESG performance comparable and transparent. These standards are currently extensively applied in most companies’ sustainability reports and create standard disclosure criteria and metrics for ESG initiatives, as suggested by the Sustainability framework issued and supported by Securities Commissions and Central Banks in various jurisdictions.

In addition to individual metrics, consolidated measures of Environmental, Social and Governance dimensions (ESG Indexes) are emerging. They integrate data from granular components of the three E, S and G pillars with different weights depending on the specific industry sector and consolidate them into a single comparable measure that reflects the broader impact of sustainability. ESG Indexes have been widely criticised for inconsistency in their outcomes. More research is needed to ensure that they properly reflect the actual and perceived performance on the sustainability of the analysed entities. However, ESG indexes are being increasingly used by financial analysts and rating agencies as a basis for decisions on credit lending or investments involving sustainability capabilities.

Whiteshield has recently launched an ESG Resilience Index to map the ESG journey of companies and jurisdictions. It examines and measures both ESG performance and ESG perception to help companies and jurisdictions identify specific gaps in the individual ESG pillars and in the way they are communicated. The performance component integrates more than 400 individual metrics for E, S, and G pillars into a single, comparable indicator (see Figure 1 below on the metrics tree for the WS ESG Resilience Index).

The perception component is calculated by reviewing and classifying thousands of ESG articles released in the financial press on a negative-to-positive sentiment scale, based on proprietary Natural Language Processing (NLP) algorithms, with scores aggregated at the E, S and G levels.

ESG is just a formal thing, merely a trend, not a core dimension of a company

ESG is just a “formal” thing, merely a trend, not a core dimension for a company”: this perception raises the issue that proficiency in ESG may be a “nice to have” feature. Still, it isn’t easy to translate into profitable contributions to a company’s P&L and eventually create long-term value for a company. A focus on ESG is just a trendy topic in top management discussions, to be addressed by a tick on a CEO’s “to do’s” list, in case someone may ask.

The impact of sustainability initiatives is becoming more and more material on risk assessment, company ratings, cost of capital and compliance, and the generation of additional revenues from ESG products and services. This is especially the case since, as stated earlier, ESG is a driver of innovation. Sustainability has become mainstream in business discussions at the corporate level as regulators and financial markets increasingly require ESG practices to be the norm for companies rather than some “nice to have” attribute and expect that corporate boards and top management will share this view. Laggards will risk being progressively penalised by market valuations, increasing costs of funding, and disappointed customers.

ESG is greenwashing

According to this perception, ESG equals “greenwashing”, and implies that companies are falsely claiming that the products and services they offer are “sustainable” or “green” to capture clients or command higher prices. Consumer associations and specialised media are pointing to examples of greenwashing practices that go from not providing any evidence to support a specific claim on sustainability to fully misleading clients with false statements.

Several companies allegedly use greenwashing practices, representing well-known and respected brands. In the meantime, analysts and financial authorities are becoming increasingly aware and intolerant of such behaviours, and ESG claims are closely scrutinised by supervisory authorities and governance boards, with penalties that have significantly hit the companies involved.

This is the case, for example, of the forced resignation of the global CEO of DWS, the asset management arm of Deutsche Bank, due to allegations of having favoured greenwashing practices in his company during his long tenure (see Figure 3 below on the timeline of events in the DWS-Deutsche Bank case).

Another relevant example is that of Shell, which was ordered by a Dutch court to cut carbon emissions by 45% by 2030 compared to 2019. The court considered Shell’s current climate strategy “not concrete enough and full of caveats”. Its shortcomings included inaccurate claims that carbon emissions levels could be offset by planting trees[1] and the plan to reduce “intensity” rather than absolute levels of carbon emissions. Both DWS and Shell were penalised for greenwashing behaviours. The corporate world was warned to carefully evaluate business practices and their approach to communication when it comes to Sustainability.  

ESG dimensions are juxtaposed but not correlated

In this case, the concern is that putting together the Environmental, Social, and Governance dimensions does not thoroughly address the topic of Sustainability and that the three areas are somehow disconnected from each other. This can also create the risk that companies with wrong metrics on one pillar, e.g. Environment, may offset the negative impact on the overall ESG value, harnessing higher scores on the other dimensions, e.g. Social and Governance.

ESG topics are becoming increasingly complex, and their implications impact all company functions and stakeholders. No individual dimension alone can capture sustainability’s implications fully, and over time the Environmental dimension has been complemented by the Social and Governance ones in a combined framework.

While there is no significant correlation among the ESG pillars, each dimension’s broad set of measures ensures that all of them together can address the different aspects of a company’s performance. Looking more closely at how the ESG dimensions are calculated, it appears clear that they are deeply connected to the critical activities of a company and directly contribute to defining its value creation, risks and opportunities. The Environment pillar includes themes such as climate change, pollution & waste, and natural capital. The Social dimension is measured by indicators of human capital and labour, health & safety, product development, consumers, and social opportunities. The Governance pillar includes factors such as ownership and control, accounting, business ethics, and tax transparency.

Credit and investment professionals apply the above-integrated logic when assessing the ESG performance for investment decisions, with weights for the three pillars depending on the specific industry and applying a minimum threshold score to ensure that all the dimensions are counted in. Governance’s relevance has been increasing over time, with a relative weight often above 30%, while social factors receive higher weights than environmental ones in several industries.

ESG is fostering inequalities rather than solving them

This refers to the burden related to the additional cost related to ESG compliance that falls disproportionally on smaller firms or some vulnerable sectors of the economy in emerging markets and mature markets alike. For example, the agriculture sector has borne heavy losses due to ESG-driven restrictions on using fertilisers or the limit of pollution from livestock (Box 1[2]).

The fact that the costs of applying ESG standards may negatively impact some sectors more than others is not an argument for abandoning the policy. Every policy intervention has potential winners and losers. What matters is the consideration of the net benefits to society while at the same time using appropriate measures and interventions to compensate the potential losers. 

In some countries, fiscal policies are designed to support small and medium size companies on Sustainability specifically. Examples of such policies include US “Investment Tax Credit” for businesses that invest in equipment to produce renewable energy and “Green jobs Initiative” grants for businesses that train their staff on sustainable business practices.

Individual financial institutions are also progressively supporting small businesses in their ESG initiatives. Examples include Intesa Sanpaolo, the most prominent Italian Retail and Commercial bank that has committed to providing between 2022 and 2025 up to 20% of new loans (worth 90 Bln Euro) with better lending conditions to borrowers with sustainable projects. Moreover, many banks offer advisory and educational services on Sustainability to small business clients to increase awareness of ESG opportunities and available tools.

These types of policies and initiatives facilitate the ESG journey for smaller companies and vulnerable sectors and provide a perspective of ESG as an opportunity in terms of new streams of revenues, a more favourable cost of borrowing for entrepreneurial initiatives, and an improved ability to manage risks.

Consumers are not interested in ESG

This refers to the perception that most consumers are unwilling to bear the supposed extra cost of ESG. It is also often assumed that interest in sustainability from a market perspective is limited only to more mature economies.

These perceptions may come from the incorrect assumption that different consumer segments in different markets all lacking interest in Sustainability.

Recent surveys[3] from First Insight and the Wharton School show that Gen Z consumers are driving shopping decisions, and they are increasingly influencing the Gen X segment (their parents) towards Sustainable products and services (see figure 4 on American Consumers’ shopping behaviours and sustainability). Those reports indicate that in the last two years, the share of Gen X consumers who are willing to pay an extra 10% price or more for ESG products has increased from 34% to 90%. The influence of Gen Z consumers is expected to increase even more in the years to come, and by 2030, they will represent 27% of the world’s income, with the potential to drive a relevant cultural shift.

Sensitivity to ESG factors is also driven by market maturity. Emerging markets’ consumers have been traditionally less interested in ESG than those in more mature ones, but this behaviour is changing, as shown by a recent study by Credit Suisse[4]. Moreover, consumers in emerging countries, also due to the Covid crisis, are becoming increasingly concerned about environmental issues, healthy living, and alternative transportation, all of which will drive their future spending decisions. 

Another loophole in the perception that consumers are not interested in sustainability comes from suppliers’ misperceptions about their customers’ attitudes toward sustainability. Market surveys show that retailers’ perception of the interest of their customers in sustainability seems significantly misaligned with customers’ own expectations, as 2/3 of clients across all segments declare they would pay more for Sustainable products, while only 1/3 of retailers are currently acknowledging that.

Source: GreenPrint Report “Business of Sustainability Index, 2021

The concerns over and perceptions of ESG must be addressed correctly and appropriate interventions must be identified to deal with any potential “loser”. Embracing sustainability in all its dimensions is not a luxury. It is a necessity that calls on all agents of society to play an active and constructive role in its pursuit.

[1] Calculations showed that the number of trees required to offset Shell’s carbon emissions would equal the number of trees in a forest the size of Brazil.

[2] In Sri Lanka, the ban on chemical fertilizers in April 2021 and the shift to organic fertilizers created a 50% reduction in crop production, resulting in a solid social and economic crisis. In The Netherlands, the current government’s plans for a 70% reduction in nitrogen pollution caused by livestock and chemical fertilizers by 2030 the risk of forcing many Dutch farmers and ranchers out of business

[3] 2022 Report from First Insight and the Baker Retailing Centre at the Wharton School of the University of Pennsylvania; 2021 Green Print Business of Sustainability Index

[4] 2021 Credit Suisse Report “Sustainability: Consumers in emerging markets ready for change.”


Vittorio Ragazzini



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