ESG
The Problem With Doing Well by Doing Good
ESG investing was supposed to change corporate behaviour from the inside — instead, it may have given bad actors the world's most profitable alibi.
The Idea
The promise of ESG — Environmental, Social, and Governance investing — was elegant: redirect capital toward responsible companies, starve the irresponsible ones of funding, and let markets do the moral work that regulation couldn't. For a while, the story held. Trillions flowed into ESG-labelled funds, and boardrooms started talking about stakeholder capitalism with apparent sincerity. But the architecture of ESG contains a flaw that was always there, just rarely named plainly. The ratings that determine whether a company qualifies as 'responsible' are produced by private agencies — MSCI, Sustainalytics, S&P — each using proprietary methodologies that often disagree wildly with each other. A company can score in the top tier at one agency and the bottom tier at another, simultaneously, for the same year. This isn't noise; it's a structural feature of a system where the thing being measured (ethical behaviour) resists quantification and the measurers face no accountability for getting it wrong. Worse, the ratings often measure a company's exposure to ESG-related risks — how much climate change might hurt its bottom line — rather than how much the company's behaviour affects the world. That's a subtle but devastating inversion. ExxonMobil, managed well enough to limit its legal and reputational exposure, can outscore Tesla on some ESG matrices. The metric has quietly rotated from 'is this company good?' to 'is this company good at managing ESG as a risk to itself?' The result is a system that has become extraordinarily good at producing the feeling of accountability without reliably producing the substance of it.
In the World
In 2022, the asset manager DWS — one of Europe's largest — became the first major firm charged with greenwashing by regulators. The accusation was specific: DWS had marketed funds as ESG-integrated when the underlying investment process often ignored ESG criteria entirely. The firm's own former head of sustainability, Desiree Fixler, had flagged the discrepancy internally before being dismissed. She then went public, and the subsequent investigation by the SEC and German regulators led to a fine and a leadership shake-up. What made the DWS case instructive wasn't the fraud itself — it was the mechanism. The firm had relied on the same ESG ratings infrastructure everyone else uses, claimed compliance with loosely defined industry standards, and produced marketing language that was technically defensible because the standards themselves were vague enough to permit it. There was no single lie. There was a fog. This is the pattern regulators are now grappling with across multiple jurisdictions. The EU's Sustainable Finance Disclosure Regulation, introduced precisely to add rigour, immediately generated a new problem: funds reclassifying themselves downward to avoid scrutiny, in what became known as 'ESG washing in reverse.' Hundreds of billions shifted out of the top-tier 'Article 9' category not because companies became less sustainable, but because the definitions tightened and firms preferred a lower label to the liability of a higher one. The market had found, as it usually does, the path of least resistance — which in this case ran directly away from the stated goal.
Why It Matters
None of this means the impulse behind ESG is wrong. The idea that capital allocation shapes corporate behaviour is correct, and the desire to make that force work for broader social goals is legitimate. The problem is that good intentions routed through poorly designed infrastructure tend to produce sophisticated-looking theatre rather than change. Knowing this should shift how you read ESG claims — on fund prospectuses, in annual reports, in the confident assertions of advisers. The question to ask isn't 'does this fund have an ESG label?' but 'what is the underlying methodology, who produced it, and what are they actually measuring?' Most people, including most financial professionals, cannot answer those questions for the products they hold or sell. It should also reframe how you think about where accountability actually lives. Markets can transmit pressure, but they can't generate standards — that requires either robust regulation with genuine enforcement, or the kind of transparency that allows comparison and shame to do their work. ESG in its current form has, in some ways, substituted for both. Recognising that gap is the first step toward demanding something better — whether as a voter, a consumer, or someone deciding where to put their savings.
A Question to Ponder
If the metrics we use to reward good corporate behaviour are controlled by private companies with no obligation to get them right, who is actually accountable for accountability?
Get a new one of these every morning.
Start learning with Thinkable