Rethinking the governance of ESG
The growing demand for truly sustainable investments masks some tensions. While there is some pushback against ESG, for example legislation in some US states threatening businesses with missions like cutting carbon emissions or DEI (diversity, equity and inclusion), there are also increasing calls for better ESG standards, greater transparency, and rejection of greenwashing. Governments, recognizing the importance of stronger ESG governance, are adopting new regulations to govern standards and reporting.
Global ESG (environmental, social and governance) assets may reach $53 trillion  by 2025. Demand for sustainable investments is exceeding supply . 550 financial institutions have joined the Glasgow Financial Alliance for Net Zero . ESG-labelled bonds made up 16% of global EUR- and USD-denominated international syndicated bonds issued in 2022, up from 14% in 2021. The number of companies (in 62 countries) appointing chief sustainability officers  jumped threefold in 2021. An Australian energy firm was fined for greenwashing .
There has been some backlash against ESG, like Florida pulling $2 billion in assets  from BlackRock to protest its support for ESG, climate action and stakeholder capitalism; and Vanguard, the world’s second largest asset manager, resigning  from the Net Zero Asset Managers Initiative.
Several recent policies create significant new incentives to invest in renewables and sustainability, like the US Inflation Reduction Act, the EU’s cross border tax on carbon  and the global convention on biodiversity target to protect 30% of the planet  for nature.
Regulations governing ESG are highly fragmented . There are over 600 ways to assess corporate ESG activity, but no global, standardised corporate disclosure requirements. While there is more data available for verifiability, ESG ratings providers all use different methods to rate companies’ performance, so investors find the ratings hard to interpret. Indeed, investors identify lack of standardisation across ESG bond ratings as the top barrier to investment .
Progress towards improving standards includes the International Sustainability Standards Board’s proposed global standards  for ESG reporting; an EU directive  that significantly expands ESG reporting obligations; and the G20 Sustainable Finance Roadmap, which encourages nature- and biodiversity-related disclosures. The UN Sustainable Stock Exchanges Initiative  is working to improve ESG disclosure  in emerging markets. Mongolia issued guidance on sustainability  reporting for Mongolian companies.
ESG regulation in the spotlight
Increasing consumer demand for sustainability
Growing demand for new forms of governance
International Sustainability Standards Board proposes global standards for ESG reporting
Companies appointing Chief Sustainability Officers in 62 countries trebled in 2021
Florida pulls $2 billion in assets from BlackRock to protest its support for ESG
UN Sustainable Stock Exchanges Initiative works to improve ESG disclosure in emerging markets
So what for development
Major investors, like pension funds, might steer clear of ESG-aligned companies - either because mandated to do so, or because they do not see ESG as a useful risk mitigation strategy. ESG’s opaque framework and inconsistent regulations are costly to navigate, and undermine trust in ESG.
How this will pan out remains to be seen. There are plenty of more positive ESG signals – investor demand, government interest, changing values – that suggest fertile ground for improved standards and accountability. Development of clear, verifiable, standardised metrics is important – which the proliferation of data may complicate, as well as help.
Are we failing to communicate the real value of ESG? The term has become fraught with so many shades of meaning that the simple “good business” message is often lost. Yet as the Business Commission on Sustainable Development notes, “Contributing to the SDGs offers a compelling growth strategy  for businesses.”
Something to watch: how the data and tech sectors respond to new incentives to invest in sustainability, perhaps identifying business startup opportunities fuelled by tax credits, or new demand for data collection and verification as ESG standards converge?
Explore more themes
The changing face of altruism
Charitable donations are increasing, with new ways of giving and, in some cases, more emphasis on long term results. Meanwhile development needs more flexible, risk-tolerant, longer-term funding, especially with ODA under pressure. While philanthropy is only a part of the funding available for sustainable development, can it inspire a more risk-tolerant approach that looks to the interests of future generations?
Why aren't we talking about a social recession?
With the global economy on the brink of recession, we are in the midst of a social recession that is equally consequential for societies and economies but is much less factored into calculations about our future: loneliness, mental health declines, stress in the workplace and trust at an all-time low.
The looming job crisis
Major economies are not replacing their populations fast enough to stave off future labour shortages in key industries, while in Africa, a rapidly-growing young population means millions of new jobs will be needed. Today’s labour policies will determine how successfully countries meet these challenges, which will require them to create high quality jobs and invest in the education and training workers need to fill them.