Environmental, Social, and Governance — ESG — once represented the future of responsible investing. Adopted broadly after the 2008 financial crisis and accelerated by global climate goals, ESG evolved into a default lens through which funds, analysts, and asset managers assessed investment decisions. For a time, it promised to align capital with conscience, uniting performance and purpose. By the late 2010s, ESG assets under management exceeded $30 trillion, and demand for ESG-labeled products surged globally.
But by 2023, the enthusiasm began to wane. Headlines no longer celebrated ESG growth; instead, they questioned its legitimacy. Regulatory inconsistencies, accusations of greenwashing, and political backlash in major economies introduced a tone of skepticism. What once seemed like a unifying framework started to fracture under scrutiny. Questions arose: Is ESG too vague? Too politicized? Too easily manipulated?
The result has been a slow but clear retreat. While ESG is still mentioned, it is increasingly diluted. Asset managers that once championed it openly now refer more generally to “sustainable investing” or “material risk factors.” The shift is not just rhetorical — it reflects strategic repositioning. A framework that grew too fast, with too many definitions and too little accountability, is now facing a credibility test.
One of ESG’s greatest weaknesses has been its success. As demand for ESG products exploded, asset managers rushed to meet the market — often without sufficient rigor or clarity. Funds were labeled ESG for excluding tobacco stocks, while others received the same label despite holding fossil fuel companies. The lack of consistent standards opened the door to greenwashing — and it didn’t take long for regulators and media to notice.
BlackRock and Vanguard, once vocal proponents of ESG as a market imperative, began to dial back their messaging. Some funds dropped the ESG label entirely, citing unclear definitions. In Europe, new regulations aimed at defining ESG categories introduced added friction and compliance complexity. Meanwhile, in the United States, the politicization of ESG — especially in state pension funds — led to restrictions and lawsuits.
ESG’s overreach into highly politicized arenas diluted its focus. Instead of representing a strategic overlay for material risks, it began to resemble a battleground for competing narratives. The result has been investor fatigue and reduced trust. For many institutional allocators, ESG is no longer a selling point — it's a due diligence red flag.
The reversal from firms that once loudly embraced ESG has been swift. Several high-profile asset managers have rebranded their ESG funds with more generic labels. Others have quietly removed ESG metrics from promotional materials. Is this simply a defensive response to political pressure, or a deeper shift in strategy?
In some cases, it reflects a realization that ESG, in its current form, has limited analytical utility. ESG ratings from different providers often diverge wildly. A company praised for environmental initiatives might simultaneously face criticism for labor practices — yet still earn an overall "high ESG score." This ambiguity undermines investor confidence and invites regulatory scrutiny.
More broadly, firms are reevaluating how ESG fits into fiduciary duty. If ESG considerations cannot be linked clearly to risk-adjusted returns, they may not be defensible in the long term. This does not mean abandoning sustainability — but it may mean avoiding ESG as a shorthand that is no longer fit for purpose.
The retreat from ESG does not mean investors no longer care about sustainability, governance, or social impact. On the contrary, many continue to factor these into their analysis — but now as part of a broader understanding of fundamental risks. Climate exposure, regulatory scrutiny, supply chain ethics — these are real, measurable forces, whether or not they carry the ESG label.
As a result, there is growing interest in more targeted frameworks: impact investing, sustainability-linked bonds, or thematic funds aligned with the SDGs. These avoid the umbrella term “ESG” and focus instead on specific goals and metrics. The emphasis is on traceability, materiality, and relevance — not labels.
This recalibration might ultimately improve investor outcomes. Without the ESG halo, funds must prove their value through performance and transparency. Investors, in turn, are challenged to ask sharper questions: What risks are we trying to mitigate? What values are we embedding — and how are they measured?
The shift away from ESG has implications far beyond branding. It reflects a deeper tension between values and valuation, between purpose and performance. Markets operate on signals, and ESG — once a strong signal — is now muddled. For asset managers, this means building new mechanisms for accountability. For investors, it means reevaluating how non-financial data fits into portfolio construction.
Regulatory bodies continue to grapple with standardization. In Europe, SFDR seeks to classify funds by sustainability impact. In the U.S., the SEC is advancing climate disclosure rules. But these frameworks are still in flux, and adoption remains uneven. As a result, global firms face a fragmented compliance landscape — just as clients demand more clarity.
Accountability may emerge not from regulation alone, but from reputation. Investors increasingly demand proof — not slogans. They want documentation of engagement, measurable outcomes, and alignment with long-term strategy. That demand may outlast any ESG backlash.
The current moment feels like a reckoning for ESG — but not its end. Like other movements that emerged from rapid enthusiasm (tech in 2000, crypto in 2022), ESG may be experiencing a necessary correction. The hype is giving way to scrutiny. The opportunists are exiting. What remains may be smaller — but more robust.
ESG was never meant to be a universal answer. It was a lens — and like any lens, it distorts as well as reveals. The next phase may involve replacing the acronym with clearer, more tailored approaches. Instead of bundling E, S, and G into a single number, firms may separate materiality by sector, geography, and stakeholder relevance.
In the end, the principles behind ESG — environmental responsibility, social impact, governance quality — will remain central to long-term investment thinking. But the vocabulary may evolve. And with it, hopefully, the rigor.
