Is ESG truly changing the world or just managing risk?

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ESG is primarily a risk-management disclosure framework rather than a direct driver of real-world change

ESG is widely used as a disclosure and rating system, and the case made here is that it functions mainly to manage financial risk rather than to force companies to change how much they pollute. The term ESG was coined in a 2005 UN-linked study titled “Who Cares Wins,” where the premise was that environmental disasters, labour strikes, and corrupt governance can destroy shareholder value. While ESG can shape market behaviour through data and policies, it is described as passive and not a mechanism that compels operational decarbonisation.
ESG was created to price risks to shareholder value
The ESG concept traces back to a 2005 “Who Cares Wins” study conducted by the United Nations in collaboration with major financial institutions such as Goldman Sachs and Morgan Stanley. That work framed ESG as a way to manage volatility by identifying how issues like environmental disasters, labour strikes, and corrupt governance could impact shareholder value. It also aimed to create a standardized framework for investors to price externalities, turning concerns such as pollution and labour conditions into quantifiable line items.
Today’s ESG is affected by greenwashing and rating disagreements
A key problem highlighted is “greenwashing,” where companies make net-zero pledges or buy low-cost carbon offsets without substantial action. ESG ratings are also portrayed as inconsistent because different agencies may score the same company differently, especially when its environmental and social records are mixed. The result is a system where “Governance” and “Social” performance can coexist with activities that remain environmentally damaging, including cases where ESG funds hold fossil fuel companies.
ESG funds can still hold fossil fuel firms, reflecting risk management
The argument points out that some ESG funds hold shares in fossil fuel companies and mining conglomerates because these firms can score well on “Governance” and “Social” protocols for workers. That framing suggests investors may be focusing on managed risk rather than purely on clean business models. In practice, it is presented as a situation where strong governance or worker-related policies do not necessarily prevent environmentally harmful operations.
Real decarbonisation depends on regulation, not ESG ratings alone
The text distinguishes ESG as a disclosure framework that tells what a company is doing, but does not force a steel mill or similar industrial operator to stop emitting carbon. It states that effective decarbonisation requires regulation, carbon taxes, infrastructure constraints on coal, and industrial policy, with ESG at most acting as a supporting actor by providing data and nudging behaviour. It also notes market behaviour can be short-term, citing a period when investors left “green” funds for oil and gas after energy prices spiked, indicating quarterly earnings can outweigh longer-term environmental goals.

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Is ESG truly changing the world or just managing risk?

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