The Three Faces of ESG

Environmental, Social, and Governance (ESG) investing has been one of the many victims of President Trump’s second term. According to Morningstar, capital has fled from ESG investment funds during President Trump’s rule.

What does ESG’s fall from grace in the United States mean for global sustainability? The answer depends on exactly how ESG funds invest. Below I will analyze three types of ESG investing and their importance for setting humanity on a more sustainable track.

1. What is ESG?

ESG is an investment strategy that considers a company's impact on the environment, its treatment of people, and the quality of its governance. For example, companies with poor environmental practices may face regulatory penalties or reputational damage, which could affect their bottom line over time.

On the environmental side, ESG investors may evaluate a company’s carbon footprint, energy efficiency, or use of sustainable resources. The social component includes issues such as labor practices, human rights, diversity, and community engagement. Governance assesses how a company is managed, including executive compensation, board independence, and transparency.

By analyzing these factors, investors aim to identify companies that are not only ethically responsible but also better positioned to succeed over the long term.

All this sounds great on paper, how does it affect sustainability? I see three faces of ESG: greenwashing, sustainable profit maximization, and true impact investing.

2. Greenwashing

Skeptics of ESG often dismiss ESG as greenwashing. Here companies publish shiny sustainability reports, hire sustainability officers – and then do nothing to actually mitigate climate change, abate pollution, or otherwise meet ESG goals.

This kind of ESG is quite clearly not useful. Companies do it to leave the impression that they consider ESG factors important. This kind of ESG is popular when public opinion and government are concerned with sustainability, but companies do not believe ESG is going to help them succeed in the long run.

3. Sustainable profit maximization

The second face of ESG is sustainable profit maximization. This strategy is popular among green capitalists, as it suggests companies eventually gain value from abiding by ESG standards.

Companies that engage in sustainable profit maximization may, for example, believe that investing in renewable energy is a cost-effective way generate electricity while minimizing the risk of carbon pricing. They could minimize their resource use to promote circular economy while reducing material costs.

Sustainable profit maximization has two limitations. First, it implies that profit is still the ...