By Luigi Capoani and Federico Moresco, of the European Youth Think-Tank
Environmental, Social and Governance (ESG) principles have become one of the defining concepts of modern business. Investors increasingly use ESG ratings to allocate capital; governments rely on them to promote sustainable development, and companies highlight them in annual reports and corporate communications [Boffo et al, 2020]. Yet the growing popularity of ESG has also created an uncomfortable paradox: while sustainability has never received so much attention, it has not always translated into meaningful economic or environmental progress: in fact firms tend to underinvests because of different scoring mechanism in the market which creates confusion in which investment and improvement to develop [Berg et al., 2022].
The challenge is therefore not to abandon ESG, but to rethink its purpose. ESG should not be viewed as a branding exercise or a compliance checklist. Instead, it should serve as a framework for directing investment, encouraging innovation, and supporting a genuine transition toward a more resilient economy.
Beyond Reporting: ESG as a Driver of Economic Transformation
Too often, ESG is reduced to metrics, disclosure requirements, and sustainability reports. These instruments undoubtedly improve transparency, but transparency alone does not reduce emissions, develop cleaner technologies, or strengthen communities.
The original objective of ESG was far more ambitious. Environmental policies should encourage businesses to use resources more efficiently. Social standards should improve working conditions and create long-term value for employees and society. Good governance should strengthen accountability, transparency, and ethical decision-making.
When these three dimensions operate together, ESG becomes a strategic tool capable of increasing productivity, reducing long-term risks, and improving competitiveness. However, when companies focus primarily on demonstrating compliance rather than implementing substantive change, sustainability risks becoming little more than another corporate slogan.
The Growing Cost of Greenwashing
One of the greatest weaknesses of today’s ESG landscape is the rise of greenwashing. As sustainability has become commercially valuable, some firms have invested more in communicating their environmental credentials than in improving their actual environmental performance [Siddique et al., 2025].
This creates significant economic inefficiencies. Financial resources, managerial attention, and professional expertise are diverted toward marketing campaigns, complex reporting exercises, and symbolic initiatives that often generate limited real-world impact.
Greenwashing also damages public trust. Consumers and investors increasingly struggle to distinguish between companies genuinely committed to sustainability and those merely seeking reputational benefits.
Rather than encouraging an endless proliferation of labels and certifications, policymakers should focus on establishing clear, internationally comparable standards. Businesses require regulatory certainty, not an ever-growing collection of overlapping reporting frameworks. Well-designed standards would reduce compliance costs while rewarding firms that genuinely invest in sustainable innovation.
Not Every Green Investment Has the Same Impact
Another misconception surrounding ESG is the assumption that every sustainable investment generates comparable environmental benefits. In reality, sectors differ considerably in both their potential impact and their investment horizon [IEA].
The energy sector remains one of the most powerful drivers of decarbonization. Investments in renewable generation, electricity grids, energy storage, and efficiency improvements create benefits that extend across the entire economy.
Scientific research offers another high-impact opportunity. Advances in battery technologies, carbon capture, sustainable materials, and digital optimization can reduce emissions across multiple industries simultaneously, producing effects that far exceed the boundaries of individual companies.
Real estate also deserves greater attention within ESG strategies. Buildings often remain in service for many decades, making energy-efficient construction and renovation investments capable of delivering environmental benefits over very long periods. Improving insulation, heating systems, and building efficiency can generate substantial reductions in energy consumption throughout an asset’s lifecycle.
By contrast, some sectors require a more nuanced assessment. The automotive industry, for example, plays a crucial role in reducing transport emissions, yet manufacturing new vehicles requires significant amounts of raw materials, energy, and industrial processes. Replacing vehicles too frequently may therefore reduce part of the environmental gains expected from technological progress. A genuine sustainability assessment should always consider the full lifecycle of products rather than focusing solely on their operational emissions.
Less Bureaucracy, More Innovation
The expansion of ESG regulation has undoubtedly improved corporate transparency, but it has also increased administrative complexity, particularly for small and medium-sized enterprises.
Reporting is important, but documentation should never become an end in itself. Every hour spent producing unnecessary paperwork is an hour not invested in research, technological development, workforce training, or process innovation.
The objective should therefore be smarter regulation rather than simply more regulation. Governments should establish clear principles, harmonized methodologies, and reliable disclosure standards while allowing businesses sufficient flexibility to pursue innovative solutions.
The transition towards sustainability will ultimately depend less on the number of reports companies publish and more on the quality of the innovations they develop.
From Compliance to Competitiveness
Sustainability should be understood not as a regulatory burden but as a source of long-term competitive advantage. Companies that successfully reduce resource consumption, improve governance, invest in innovation, and build stronger relationships with employees and communities are likely to become more resilient in an increasingly uncertain global economy.
ESG should therefore evolve beyond corporate communication and become a genuine economic strategy. The future of sustainable business will not be determined by the sophistication of marketing campaigns or the volume of sustainability reports, but by measurable improvements in productivity, technological progress, and environmental performance.
Ultimately, the success of ESG will depend on its ability to move beyond symbolism. The real transition is not about producing more sustainability narratives; it is about creating better technologies, more efficient industries, and stronger institutions. Only then can ESG fulfil its original promise of aligning economic growth with environmental responsibility and social progress.
Sources;
Berg, Florian, et al. “Aggregate Confusion: The Divergence of ESG Rating.” Review of Finance, vol. 26, no. 6, 23 May 2022, pp. 1315–1344, 10.1093/rof/rfac033.
Boffo, R., and R. Patalano (2020), “ESG Investing: Practices, Progress and Challenges”, OECD Paris, www.oecd.org/finance/ESG-Investing-Practices-Progress-and-Challenges.pdf
IEA (2021), Net Zero by 2050, IEA, Paris https://www.iea.org/reports/net-zero-by-2050, Licence: CC BY 4.0
Siddique, Md. Abubakar, et al. “The Truth Behind Sustainability Claims: Examining Carbon Risk, ESG Disclosures, and Greenwashing.” International Review of Financial Analysis, vol. 109, 12 Nov. 2025, p. 104735, https://www.sciencedirect.com/science/article/pii/S1057521925008221, 10.1016/j.irfa.2025.104735. Accessed 9 July 2026.
