Exploring Controversies Around ESG Investing

By Diogo Ribeiro Dos Santos, GLOBUS Correspondents

ESG investing is the present’s equivalent to ‘sustainable’ investing—it allows you to grow your money whilst supporting companies that are making a change for the better – or so goes the current rhetoric. In my previous article, I go into detail on how you can make a difference through ESG Investing. However, in this article I will address criticisms and controversies surrounding this form of investing. 

ESG Investing is now the fastest-growing segment of the asset management industry. The ESG assets under management (AUM) have grown by $2.7 trillion in 2021. This has made it an incredibly profitable sector that asset managers are rushing into hand over fist, and where there’s money there’s trouble.

Criticism has appeared from both aisles of the political spectrum. Whilst progressives criticize ESG investing for still being massively invested in oil companies and purposefully allowing greenwashing, conservatives see this as a boycott on oil and energy companies. Recently, US states like Florida have attacked ESG Investing for allegedly ‘boycotting’ energy companies, and have banned their $186 billion pension fund from investing according to ESG criteria. Some might see this as preposterous. Why would an ESG fund ever invest in unsustainable energy companies? Well, while some argue ESG investment products should completely divest from oil and fossil fuels, others believe companies in these sectors that are taking radical change towards more sustainable options should be included. Who is right? I believe it’s unclear.

Criticisms came into sharp focus on May 31, 2022 when German police raided offices of asset manager DWS and Deutsche Bank as part of a probe into greenwashing allegations. It was the first time an asset manager had been raided in an ESG investigation. This further supports the claim that asset managers are doing everything in their power to jump into the ESG Investing bandwagon, going as far as committing fraud. 

ESG Lacks in Standardized Rules and Agreed Definition

The lack of standardized rules around what constitutes ESG investing has left it up to the discretion of asset managers and fund providers to decide what it means. This has caused serious issues, as great disparities in ESG ratings have emerged between asset managers. Whilst some say a company may be very ‘sustainable’ or have a very high ESG score another may be saying the complete opposite about that firm/fund, which poses a great issue for investors when deciding what to invest in. Imagine a massive bank like HSBC says a stock, or a fund is very ‘sustainable’ and has a very high ESG rating, whilst the biggest asset manager in the world like Blackrock says it’s extremely ‘unsustainable’ with a very low ESG rating. Who is right? Once again, the answer is unclear. 

Furthermore, the term ESG is rapidly becoming an all-encompassing phrase from anything that divests from tobacco, defence, or oil to focusing on sectors such as clean energy. Whilst this flexibility may be a positive as it gives greater options to investors in terms of choice, there is also a fine line between flexibility and ambiguity. Even the Financial Times has said “The term ESG is less than two decades old, but it may already be coming to the end of its useful life”. Some argue we don’t even know the meaning of ESG investing anymore as it muddles objective assessments of environmental risks and opportunities and the topic of values and ethics. 

Russia’s war on Ukraine has pitted ESG’s E, S and G against each other. For instance, governments reneging on environmental goals by turning to fossil fuels to reduce dependence on Russian gas, to fulfil ethical goals. So how can something be ESG if E contradicts S, or S contradicts G? Is ESG and Sustainability really the same thing?

ESG as A Political Tool

There is also strong backlash around the ESG Investing push of certain political agendas. Asset managers who create ESG funds are given the voting rights of the shares within it. This allows them to push their own agendas within the corporate world. Should they be given all this power? As sustainability is inherently a progressive idea, many conservatives criticize they are using this power to push for ‘woke’ policies within corporations

ESG criteria encompasses gender inclusion in a company’s boards of directors. It ranks companies more highly for having more diverse boards. Asset managers also use their voting rights to pressure or force companies to turn their board of directors more diverse. However, Warren Buffet, arguably the greatest investor and philanthropist of all time, has long talked about the importance and difficulty of having ‘good’ boards of directors that correctly represent shareholders and manage all stakeholders involved. The importance of proper incentives, independence from management, and ability to stand-up to management result in there seldomly being the right directors in place. As such, he has stressed the importance that directors be chosen independently of ethnicity or gender and has long opposed forced or pressured diversity of boards (Cunningham, 2013). This point is further emphasized by former SEC chairman Arthur Levitt (Levitt and Dwyer, 2002). 

ESG’s Ethics and Performance Issues

Defence is yet another area of controversy as many ESG funds will exclude this sector. Many ESG funds exclude this sector from investment on the basis of being unsustainable however, some people such as Artis Pabriks, Latvia’s defence minister, have recently taken aim against Swedish banks who refused to give a loan to a Latvian defence company due to “ethical standards”. She asks if it is unethical to allow ESG investors to support the armament of sovereign states against an aggressive neighbour.

There is also controversy around the performance of ESG funds. Some claim that ESG funds outperform the market average and other similar non-ESG funds, however there also exists much evidence that refutes that claim (Hartzmark and Sussman, 2019). Many investors may be ready and willing to have reduced performance for the sake of supporting the environment and society. Yet, studies by Columbia University, London School of Economics, and the European Corporate Governance Institute have found that ESG portfolios had worse compliance records for both labour and environmental rules (Brandon et al., 2022; Raghunandan and Rajgopal, 2022). An article by the Harvard Business Review argues how ESG investing not only is not succeeding in accomplishing ESG objectives, but it’s also even directing capital towards poor business performers.  

Final Thoughts

Last year I personally conducted a placement year at HSBC UK in their Wealth Management division. I met and worked with the ESG team in my time there. The head of their team was even my mentor. The people I met there were all very enthusiastic and passionate about contributing towards the betterment of society by providing products to HSBC’s clients that in their eyes would be helping society and the world. Clearly, many if not most of those providing us with ESG products have good intentions. 

So, what is the truth? Is ESG Investing a sham created by banks to rip us off? Or is it a tool to help us direct our money towards bettering society? The answer is convoluted. I believe we each should thoroughly research any investment we want to make, and then come to our conclusion in the matter. However, financial products are complex and hard to analyse and most of us are therefore incapable of doing so. And so, we’re back to – the answer is convoluted. 


Brandon, R., Glossner, S., Krueger, P., Matos, P. and Steffen, T., 2022. Do Responsible Investors Invest Responsibly?. Review of Finance, (Forthcoming).

Cunningham, L., 2013. The essays of Warren Buffett: Lessons for Investors and Managers. 4th ed. Wiley.

Hartzmark S. and Sussman, A., 2019. Do Investors Value Sustainability? A Natural Experiment Examining Ranking and Fund Flows. The Journal of Finance, 74(6), pp.2789-2837.

Levitt, A. and Dwyer, P., 2002. Take on the Street: What Wall Street and Corporate America Don’t Want You To Know and How You Can Fight Back. Pantheon Books.

Raghunandan, A. and Rajgopal, S., 2022. Do ESG funds make stakeholder-friendly investments?. Review of Accounting Studies, 27(3), pp.822-863.

Header Image via Getty

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