The ESG investment movement has faced significant pushback in recent years, both from advocates of corporations playing a role in social good and from those wholly opposed to the idea. Some of this is justified—the data and decision-making underlying ESG funds and ratings can often be shoddy and confusing—but this is not always true. No matter one’s view, the ESG investment industry is a very large market. It currently represents somewhere between $30 and $40 trillion in assets under management globally, and despite some recent performance wobbles and drawdowns, that number is expected to grow to between $35 and $50 trillion by 2030.
While ESG and impact investing share a similar view that corporations that are effective at managing their impact on various stakeholders will reduce risk and thus improve returns in the long run, their objectives and mechanisms to create positive impact are quite different. ESG investing looks to integrate the environmental, social, and governance practices of a company into the investment analysis but stops short of necessitating a measurable impact from the investment. In other words, the objective is not to drive impact through your investment but to consider the impact that would occur regardless of whether you invest. The theory is that if enough investors act in this way, corporations will be more likely to choose to have a positive impact to gain the interest of investors or avoid backlash from them.
This differs greatly from impact investors, who expect a direct positive impact from each investment.
This lack of direct impact is why many impact-supportive investors take issue with ESG and see impact investing as a necessary and much-needed corrective. “What is the point if there is no impact?” they ask, and follow up with worries of greenwashing, which is the opportunistic marketing of social or environmental benefits without substantial evidence. It’s true that the top holdings in many ESG funds include Microsoft, GE, or even Royal-Dutch Shell, which makes it hard to see any difference between an ESG and a non-ESG fund.
We can debate ESG’s merits as an impact investment strategy, but it is an important and growing concern to corporations. This is especially true for large, multinational businesses that are keen to impress consumers, regulators, investors, and employees with their ESG bona fides and actions. The rise of corporate social responsibility (CSR) roles at corporations to manage ESG data and questions from investors and the public is exactly why some believe that “woke capitalism” threatens democracy.
ESG under attack
The trouble is that ESG has become a victim of its success and is now a lightning rod for politicians who don’t fully understand it. The acronym is a catchall for every type of potentially socially good investment. In reality, it has developed into a risk management tool respected by the most sophisticated investors regardless of any impact objective.
How and why did this happen, and what should impact investors do with it?
In the early days, it was a simple and fairly intuitive way to denote some industries or companies as “bad” because of their negative effect on the environment and society. Most commonly included were the “sin” industries—tobacco, alcohol, gambling, and firearms. “Socially responsible investing,” as it was called at the time, typically utilized negative screens to create portfolios free of whatever an investor wanted to screen out, offering investors a way to “do no harm.”
But rather than focus on the “bad companies” and avoid highlighting the differences in everyone’s personal beliefs, James Gifford and Paul Clements-Hunt at the United Nations Environment Program Finance Initiative (UNEP FI) and Georg Kell at the UN Global Compact had the brilliant idea of shifting the conversation to the potential value creation from effective management, or value destruction of mismanagement, of various issues. Environmental, social, and governance were simply three broad categories for communicating the potential issues that the UNEP FI discussed in their seminal report “Who Cares Wins” in 2004. Since then, the acronym ESG has taken off as a less judgmental and more easily embraced term by the financial industry.
As the field grew more sophisticated, it evolved rigorously to consider the percentage of revenues a business might derive from these industries. For example, a pulp and paper manufacturer with significant customer concentration in Phillips Morris or an advertising business specializing in alcohol may be excluded from a portfolio. The list of activities or products deemed negative for society also grew to include nuclear weapons, pornography, fossil fuels, and others.
In the aftermath of the 2008 financial crisis, both institutional and retail investors have become more attuned to sustainability factors, and they got a further boost of interest in the post COVID-19 era. The development of public equities ESG strategies, which today is most commonly referred to as ESG investing, coincided with the advent of exchange-traded funds (ETFs), and the interest in these types of products has quickly come to dominate the marketplace. The fast-paced growth of the ESG marketplace led to a number of the criticisms we hear today.
Ironically, the birth of the ESG acronym in 2003 came from an attempt to move beyond any subjective view of what is good or bad for society and instead to help identify a range of business management practices that were once considered “nonfinancial” but are now seen as having a potentially material effect on strategy, revenues, expenses, and profits.
ESG baseline
It is surprising to me that successful investors never thought these practices would have a financial effect. Just consider the legal liability from exposing employees to significant safety risks or the failure to account for an increase in flood or other climate-related risk as a result of climate change. The effect of several environmental, social, and governance factors could also play out against a corporation’s brand reputation, impacting its stock price or its ability to attract and retain employees. In hindsight, the choice of these three words—environmental, social, and governance—was perhaps so broad that it opened up the risk of criticism. For example, environmental considerations include how a company manages its waste to employee and community safety. Surely, counting plastic utensils in the company kitchen and whether a company knowingly pollutes the environment through risky manufacturing practices feel like two very different types and magnitudes of harm. Similarly, governance factors include everything from executive compensation to data privacy.
Fortunately, the understanding and analysis of ESG factors have grown more sophisticated over the years to make the link to financial performance clearer. Most notably, the Sustainable Accounting Standards Board (SASB) and International Sustainability Standards Board (ISSB) were created and subsequently consolidated under the IFRS Foundation in 2022. The organization provides industry-specific guidance on the relevant ESG factors affecting enterprise value. The standards identify factors considered most relevant to financial performance across 77 industries, with an average of seven factors per industry.
These standards provide a baseline for companies to know what to manage rather than starting from the rather ambiguous and unending factors that could fall under environmental, social, and governance. Moreover, the standards were developed with a rigorous and transparent standard-setting process that included evidence-based research; broad and balanced participation from companies, investors, and subject-matter experts; and oversight and approval from an independent board. The standards are publicly available and updated regularly to incorporate the latest data and insights.
Executives embrace ESG
ESG standards can be useful to businesses and investors. J.B. Hunt Transport Services is one of the world’s largest supply chain companies and the first road transportation company to utilize SASB. Facing risks and scrutiny about its climate impact from investors and other stakeholders, the company also saw an opportunity to address these challenges head-on and set an ambitious goal to reduce carbon emissions by 32% by 2034. Knowing where to start was a challenge, and utilizing the SASB standards helped the company to identify which key metrics to track, manage, and show progress. Today, J.B. Hunt is focused on incorporating alternative-powered equipment into its fleet, expanding the use of biogenic fuels, and improving fuel economy.
SASB helped the company identify other ESG factors, including worker safety, that are also worth managing closely due to their materiality to the business.
With evidence-based guidance on what corporations should manage to avoid costly risks, it’s no surprise that executives have embraced ESG. The exponential growth of ESG assets under management only underscores the importance. It is no longer just mission-driven or socially responsible investors looking for companies managing ESG well, but some of the world’s largest and most influential investors that want to avoid risks in their portfolios.
In March 2020, the chief investment officers of the world’s three largest pension funds—the California State Teachers’ Retirement System (CalSTRS), the Japanese Government Pension Investment Fund (GPIF), and the U.K.’s Universities Superannuation Scheme (USS)—penned a letter making the case that “if we were to focus purely on the short-term returns, we would be ignoring potentially catastrophic systemic risks to our portfolio” and that “asset managers that only focus on short-term, explicitly financial measures, and ignore longer-term sustainability-related risks and opportunities are not attractive partners for us.”
Excerpted with permission from the publisher, Wiley, from The Little Book of Impact Investing: Aligning Profit and Purpose to Change the World by Priya Parrish. Copyright © 2025 by Priya Parish. All rights reserved. This book is available wherever books and eBooks are sold.
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