They say the road to hell is paved with good intentions, and in the case of ESG, it’s lined with carbon credits, governance checklists, and social impact reports. But what if, in their zeal to save the world, ESG enthusiasts end up turning developing nations into well-behaved but economically shackled colonies?
The ESG (Environmental, Social, and Governance) movement increasingly operates as a mechanism of neocolonial economic control, compelling developing countries to adopt standards that primarily reflect Western concerns, often at the expense of their own developmental priorities. Empirical studies and critical analyses have highlighted how this imposition of ESG criteria can stifle economic growth, exacerbate global inequalities, and reinforce a Western-centric worldview that neglects the socioeconomic realities of the Global South.
Several studies have documented the disproportionate emphasis on environmental standards, particularly carbon emissions, within ESG frameworks, which are largely shaped by the agendas of Western financial markets and institutions.
For instance, research by Kotsantonis and Serafeim (2019) indicates that ESG criteria are predominantly influenced by the preferences of institutional investors from the Global North, who prioritise environmental metrics due to regulatory pressures and consumer demand in their home markets.
This focus on environmental sustainability, while critical in addressing global climate change, often sidelines more immediate and context-specific challenges faced by developing countries, such as poverty alleviation, infrastructure development, and access to basic services.
Exacerbating economic vulnerabilities
The prioritisation of carbon emissions, for example, can lead to the penalisation of industries in developing countries that are vital for economic growth and employment but are also carbon-intensive.
A study by Aisbett and McKibbin (2018) on the impact of carbon regulation on developing economies found that stringent carbon reduction targets, as mandated by global ESG standards, could reduce GDP growth rates in these countries by as much as 2% annually.
This reduction is particularly concerning in regions where economic expansion is essential for lifting large segments of the population out of poverty. The study further argues that these ESG-driven mandates could discourage foreign direct investment in key sectors, exacerbating economic vulnerabilities rather than addressing them.
Moreover, the social and governance components of ESG frameworks often reflect Western legal and institutional norms, which may not align with the local governance structures and cultural practices of developing nations.
The ESG movement’s emphasis on uniform standards also overlooks the heterogeneity of socioeconomic conditions across developing countries. A meta-analysis by Marano and Kostova (2016) found that the effectiveness of ESG practices varies significantly depending on local institutional contexts.
Employment and economic diversification
In many cases, the rigid application of Western-derived ESG standards has led to negative outcomes, such as reduced access to credit for small and medium-sized enterprises (SMEs) in developing countries, which are often unable to meet the stringent requirements imposed by ESG ratings agencies. This is particularly problematic given that SMEs are critical drivers of employment and economic diversification in these regions.
Additionally, the financialization of ESG through ratings and indices, dominated by Western agencies, further entrenches global inequalities. These ratings are often based on data and methodologies that do not accurately capture the local impacts of corporate practices in developing countries.
Studies by Berg et al. (2019) have highlighted the inconsistencies and lack of transparency in ESG ratings, pointing out that they often reflect the biases and priorities of Western investors rather than the realities on the ground. For example, a company in a developing country might be rated poorly for its carbon footprint, despite its significant contributions to local economic development and poverty reduction.
Robert G. Eccles, in his recent Harvard Business Review essay, critiqued the ESG framework by highlighting its growing flaws and the divisive political nature surrounding it. Critics from both the left and right sides of the political spectrum have raised concerns: those on the left argue that ESG is insufficient for addressing critical issues like climate change, while those on the right see it as an attempt to impose a liberal agenda that distorts free markets.
Criticism for greenwashing
Additionally, ESG has faced criticism for greenwashing, where companies exaggerate their environmental and social efforts to appear more responsible than they actually are. This scepticism has led some corporate leaders to practice “greenhushing,” avoiding publicising their ESG initiatives altogether due to the growing controversy and loss of credibility associated with the framework.
A significant challenge within the ESG debate is the concept of materiality, which deals with what a company should focus on regarding its environmental and social responsibilities. Single materiality suggests that companies should prioritise only those issues that directly affect their financial performance and shareholder value, such as environmental risks that could harm profits.
In contrast, double materiality advocates that companies also consider their broader impacts on society and the environment, even if these do not directly influence their bottom line. This idea has sparked intense debate because measuring these wider impacts is challenging, and there is disagreement over whether companies should be held accountable for them.
While some argue that double materiality is essential for genuine corporate responsibility, others believe it imposes unrealistic expectations. This ongoing tension highlights the complexities in defining the role of corporations in addressing societal and environmental challenges in today’s world.
These problems will ensure that ESG will never be universally accepted. In other words, ESG is dead, and it’s time to move beyond it. Rather than clinging to outdated frameworks, we should focus on clear, actionable strategies that genuinely align corporate purpose with sustainable, long-term value creation.
Aditya Sinha (X: @adityasinha004) is Officer on Special Duty, Research, Economic Advisory Council to the Prime Minister of India.
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