April 22, 2025
#23 New Glossary Entry “ESG”
ESG has become a common term in the world of money management, including the field of agri-investment. The University of Sydney’s Claire Parfitt, a political economist and one of the leading scholars on the topic in the domain of institutional investment, provides a critical genealogy of the term.
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One of the most notorious trends in the financial sector in the last decade has been the growing concern with ESG (environmental, social and governance) issues in investment decision making. The practice enjoyed a dramatic rise with accelerating flows into ESG funds up to 2022, followed by a precipitous decline, prompted by inflation, rising interest rates and fossil fuel prices, backlash against sustainability politics and claims of greenwashing. The fate of ESG investing remains quite unclear, with some predicting a collapse, especially in the context of the Trump administration. Others are confident in its continuing relevance with new requirements for sustainability reporting and disclosure in the European Union (EU) and elsewhere
[1] [2] [3].
The furore around ESG investing is all the more baffling when one looks behind the hype and the rhetoric to consider what it means in practice. ESG investing, sometimes called ESG integration, emerged from 1990s / early 2000s Third Way politics and a capitalist realist
[4] context that surrendered the pursuit of political solutions via the state to the market (see also
[5]). The practice is famously poorly defined
[6] [7] [8]. This conceptual ambiguity has supported the growth of ESG, but perhaps also its decline, making it vulnerable to broadly unfounded claims of “wokeness”.
The term ESG was first coined in a United Nations Global Compact report entitled ‘Who Cares Wins’. The Global Compact, the world’s largest voluntary corporate social responsibility initiative, advocated a socially responsible approach to business activity on the basis that this would be more profitable. The ‘Who Cares Wins’ report suggested that firms would enjoy greater shareholder value if they more effectively identified and managed risks and opportunities arising from ESG issues like employment relations, carbon emissions and corruption. This proposition was rather questionably extended to argue that ‘a better consideration of environmental, social and governance factors will … contribute to the
sustainable development of societies’ (
[9] p. ii emphasis added). This stretch was not explained but is a paradigmatic example of the slippage in ESG practice and discourse whereby what is good for firms is assumed to be good for other “stakeholders” such as workers, local communities and consumers
[6] [10].
Part of the explanation for the post-political framing of ESG, which denies a conflict of interests between firms and other parties or stakeholders, is the fact that ESG practice emerges alongside the expansion of financial markets into everyday life
[11] [12] [13]. The privatisation of pension savings, in particular, means that hundreds of millions of working people (though only in a few select jurisdictions) ostensibly have a stake in the business of investee firms
[14] [15] [16]. The implication that workers’ interests and firms’ interests are therefore aligned, of course, obscures the contradictions embedded in these capital-labour relations. Most fundamentally, it obscures the contradiction that suppression of workers’ wages and conditions supports the profits of the firms they are employed by, and possibly, invested in.
This contradiction also speaks to a long-standing debate about ESG: the extent to which the ESG issues considered by fiduciaries (those who manage other people’s money, which is the majority of the investment sector) must be strictly financial in nature. The United Nations Principles for Responsible Investment (UNPRI) was founded in 2006, shortly after the publication of the ‘Who Cares Wins’ report, and has long since advocated that investor’s fiduciary duties
require them to consider ESG risks. Crucially, the UNPRI and related ESG advocates stipulate that ESG must be considered by fiduciaries because they can have ‘
a material impact on the financial performance of securities’ (
[17]: 6, emphasis added). That is, fiduciaries must consider
financially material ESG risks. This has become a widespread principle in ESG investing practice. As has been recognised by Tariq Fancy (former head of sustainable investment for BlackRock) and others
[18] [19] [6], the constraint of financial materiality completely undermines the proposition that ESG investing is beneficial for stakeholders other than the investor. ESG investing is concerned only with the impact of ESG issues on investment returns. It is not concerned with the impact of investors on workers, communities, ecologies or any other ESG issue.
Despite the constraint of financial materiality and the way this undermines ESG investing’s capacity to meaningfully re-organise economic activity according to its ecological and social impacts, ESG has become a focus for climate finance. Its underlying assumption that ESG risks can be beneficially traded and managed via financial markets to the point where there is no conflict between profit and principles has proven very attractive.
The limits of ESG in practice, however, are becoming clear. First, the flimsy definitions of ESG investing and related practices such as sustainable or
responsible investing, have left ESG investors vulnerable to attack by fossil fuel allies and other anti-woke factions. This has led to an extraordinary political contest in the United States (USA) in particular, where red state governors and treasurers have brought legal action against fiduciaries and imposed restrictions on ESG investing
[20];
[3]. Second, ESG investing is vulnerable to claims of greenwashing, again partly due to the ambiguous relation between ESG investing and sustainable or responsible investing. This has manifested in legal action as well as a raft of new regulations on disclosure and reporting on ESG and sustainability in many jurisdictions including the USA, EU, the United Kingdom and Australia
[21] [22] [23] [24] [10].
[1] Boyde E (2024) ESG investors retain a glimmer of hope even after Trump’s victory. Financial Times, 9 December. Available at: https://www.ft.com/content/a7dd525b-0422-4757-aa56-c6deaa818102 (accessed 21 January 2025).
[2] Masters B and Temple-West P (2025) BlackRock quits climate change group in latest green climbdown. Financial Times, 9 January. Available at: https://www.ft.com/content/f0fb9841-db1d-442e-a757-1a1327497fb1 (accessed 21 January 2025).
[3] Ross A (2025) Can sustainable investing survive Trump 2.0? Financial Times, 17 January. Available at: https://www.ft.com/content/14ee5968-79de-42bf-80a4-811531e80de7 (accessed 21 January 2025).
[4] Fisher M (2009) Capitalist Realism: Is There No Alternative? Winchester, UK: Zero Books.
[5] Pollman E (2022) The Making and Meaning of ESG. 4219857, SSRN Scholarly Paper. Rochester, NY: Social Science Research Network. Available at: https://papers.ssrn.com/abstract=4219857 (accessed 21 January 2025).
[6] Parfitt C (2020) ESG Integration Treats Ethics as Risk, but Whose Ethics and Whose Risk? Responsible Investment in the Context of Precarity and Risk-Shifting. Critical Sociology 46(4–5): 573–587.
[7] Parfitt C (2024b) False Profits of Ethical Capital: Finance, Labour and the Politics of Risk. Manchester: Manchester University Press.
[8] Wigglesworth R (2018) Rating agencies using green criteria suffer from ‘inherent biases’. Financial Times (FT.Com), 21 July.
[9] Global Compact. (2004). ‘Who cares wins’. Retrieved January 24, 2024, from https://www.unepfi.org/fileadmin/events/2004/stocks/who_cares_wins_global_compact_2004.pdf
[10] Parfitt C (2024a) ESG integration and its derivative logic of ethics: exposing the limits of sustainability capitalism. Finance and Space 1(1). 221–239.
[11] Braun B (2022) Fueling Financialization: The Economic Consequences of Funded Pensions. New Labor Forum 31(1) 70–79.
[12] Bryan D and Rafferty M (2018) Risking Together: How Finance Is Dominating Everyday Life in Australia. Sydney: Sydney University Press.
[13] Martin R (2002) Financialization of Daily Life. Philadelphia, Penn: Temple University Press.
[14] Feher M (2018) Rated Agency: Investee Politics in a Speculative Age (tran. G Elliott). New York: Zone Books.
[15] Ghilarducci T (2003) Labor’s Capital: The Economics and Politics of Private Pensions. Cambrdige, Mass: The MIT Press.
[16] Webber D (2018) The Rise of the Working-Class Shareholder. Cambridge, Mass: Harvard University Press.
[17] UNEPFI and Freshfields Bruckhaus Deringer (2005) A legal framework for the integration of environmental, social and governance issues into institutional investment. Geneva, Switzerland. Available at: https://www.unepfi.org/industries/investment/a-legal-framework-for-the-integration-of-environmental-social-and-governance-issues-into-institutional-investment/.
[18] Buller A (2022) The Value of a Whale: On the Illusions of Green Capitalism. Manchester: Manchester University Press.
[19] Fancy T (2022) The Secret Diary of a ‘Sustainable Investor’ — Part 1. In: Medium. Available at: https://medium.com/@sosofancy/the-secret-diary-of-a-sustainable-investor-part-1-70b6987fa139 (accessed 30 September 2023).
[20] Masters B and Temple-West P (2023) Wall Street titans confront ESG backlash as new financial risk. Financial Times, 1 March. Available at: https://www.ft.com/content/f5fe15f8-3703-4df9-b203-b5d1dd01e3bc (accessed 1 May 2023).
[21] Agnew H, Klasa A and Mundy S (2022) How ESG investing came to a reckoning. Financial Times, 6 June. Available at: https://www.ft.com/content/5ec1dfcf-eea3-42af-aea2-19d739ef8a55 (accessed 1 April 2023).
[22] Barton RE (2022) The greenwashing wave hits securities litigation. Reuters, 22 September. Available at: https://www.reuters.com/legal/legalindustry/greenwashing-wave-hits-securities-litigation-2022-09-22/ (accessed 22 April 2023).
[23] Flood C (2023) UK regulator takes aim at index providers over greenwashing. Financial Times, 22 March. Available at: https://www.ft.com/content/0ea165df-6e5f-4c2a-b780-17ef5aa123f7 (accessed 1 April 2023).
[24] Clapp J (2016) Responsibility to the rescue? Governing private financial investment in global agriculture. Agriculture and Human Values 34 (1) 223-235.