Rejoice! The Financialization of ESG is Dying

How the Misguided Financialization of ESG is Finally Unraveling, and What Lies Ahead for Business and Society

The concept of Environmental, Social, and Governance (ESG) has, for years, been touted as a new paradigm for responsible business practices. It was championed as a bridge between corporate profitability and societal good—a way to align shareholder value with a company’s commitment to sustainability, human rights, and ethical governance. However, in recent years, ESG has morphed into something far more mechanistic and misguided: it became financialized.

Dr. Joe Zammit-Lucia, in his thought-provoking piece, argues that this financialization is not only misplaced but is now finally collapsing. And we should all be rejoicing.

The Politicization of ESG: A Reality Check

In a recent editorial, the Financial Times noted that the once-glowing appeal of ESG has dimmed, blaming its downfall on politicization. However, as Dr. Zammit-Lucia points out, this assessment flips reality on its head. ESG was never a financial issue that became political; it has always been political in nature, involving societal debates about the role of business and the externalities it produces.

ESG asks fundamental questions: How should businesses address environmental concerns and social responsibilities? How do we eliminate harmful practices like child labor in global supply chains? How should we consider national security in a globalized economy? These are political issues, not merely corporate metrics.

As public debate shapes the future of these issues, various perspectives will emerge—each vying for influence. These debates are bound to shift over time, as society’s moral intuitions evolve. But instead of embracing the inherent complexity of ESG, the corporate world and investors sought to simplify and commodify it.

The Problem with Financialization

In the rush to turn ESG into a metric-driven, financially lucrative framework, its true political essence was lost. The idea that ESG would lead to immediate profitability gained traction, although it has always been unclear how internalizing external costs would yield short-term profits.

The financialization of ESG led to the belief that shareholders were the key drivers of change. ESG became synonymous with ticking boxes and following external rating agencies’ definitions of compliance. A muddled set of metrics emerged, reducing complex socio-political questions into simplistic, quantifiable targets. Companies, eager to appease investors, marketed themselves as ESG-compliant by focusing on minor changes rather than embracing genuine, long-term transformation.

This short-termism culminated in the rise of ESG funds, where stock pickers saw ESG as a quick route to investment returns, rather than a serious effort to rethink corporate responsibility. As one executive bluntly admitted, their ESG program existed solely to access funds during a business “flip”—proof that financialization had strayed far from the original intent.

A System Bound to Collapse

The notion that ESG could be reduced to technical measurements and compliance exercises was always unsustainable. The complexities surrounding the political role of business cannot be captured by a formulaic approach. Neither can investors, with their often short-term focus, drive the deep, long-horizon changes needed in corporate behavior.

ESG metrics, which have been distorted by financial interests, fail to address the nuanced and evolving expectations of society. Yet, as the Financial Times rightly points out, the principles underlying ESG are now entrenched. Society’s expectations of business have changed permanently. The question is no longer whether ESG metrics will fade into irrelevance, but how companies can align their strategic decision-making with the changing political landscape.

A Return to Strategic Thinking

As the financialized version of ESG fades, businesses will need to shift their focus back to where it should have always been: how to remain successful in a rapidly evolving socio-political environment. Research shows that 70% of companies have yet to incorporate ESG into their strategic decision-making, opting instead to follow the path of short-term, mechanical compliance. However, those companies that have embraced a more thoughtful and long-term approach are positioning themselves for future success.

The collapse of financialized ESG marks a turning point. In a few years, ESG funds may well be a thing of the past, replaced by more nuanced approaches that focus on how businesses can navigate shifting social mores and political expectations. Companies that ignore the hype around short-term ESG metrics and instead build a strategic foundation for long-term success will emerge as the true leaders.

The Road Ahead: Beyond ESG

The end of financialized ESG is not a defeat for responsible business practices. Rather, it is an opportunity to refocus on the core questions that ESG was meant to address: How can businesses operate ethically in a world where societal expectations are in constant flux? How can they contribute to social progress while remaining profitable? These are questions that cannot be answered through box-ticking or shallow metrics, but through strategic foresight and a deep understanding of the political landscape.

Opposition to change is inevitable, and there will always be those who resist shifts in the status quo—just as slave traders once vehemently objected to the abolition of slavery, claiming it would destroy their business model. But history has shown that such resistance is futile. Businesses that cling to outdated practices in the name of short-term profits will find themselves on the wrong side of history.

The financialization of ESG may be dying, but the political and moral debates that ESG embodies will continue to shape the future of business. As Dr. Zammit-Lucia asserts, we must now focus on which companies are prepared for this future, not based on arbitrary metrics, but on their ability to evolve with the times.

In the end, ESG is not dead. It is merely shedding its financialized skin, allowing the real political and societal issues to come back into focus. Long live the true spirit of ESG—whatever form it may take tomorrow.