The Phantom Boom: How ESG Venture Capital Is Inflating the Sustainability Bubble

By Akira Watanabe Jul. 13, 2025

In the post-pandemic decade, sustainability became the language of capital. Venture capital firms once obsessed with SaaS and fintech have rebranded around ESG (Environmental, Social, and Governance) principles. Yet behind the banners of “impact investing” lies a speculative boom uncannily similar to the dot-com bubble. Overvalued startups, ambiguous metrics, and policy-driven hype have inflated a phantom economy of sustainability—where valuations grow faster than verified impact.

The Surge of Green Capital

According to PitchBook’s 2024 Impact Investing Report, ESG-focused venture funds raised US$73.1 billion globally in 2023, a sixfold increase since 2018. Sectors such as carbon accounting, sustainable packaging, and climate fintech are attracting unprecedented valuations. In 2022–2024 alone, over 230 “green unicorns”—startups valued above US$1 billion—were minted. Yet less than 14% of them have achieved verified environmental outcomes through third-party audits.

The Global Impact Investing Network (GIIN) estimates that up to US$210 billion of current ESG assets are “self-certified,” meaning firms define and report their own sustainability criteria without standardized oversight. As a result, the ESG venture ecosystem has become a playground for narrative-driven speculation.

Valuation without Verification

Unlike traditional industries, ESG startups benefit from policy-induced demand. Subsidies and regulatory deadlines create guaranteed markets, such as the EU’s Carbon Border Adjustment Mechanism (CBAM) or the U.S. Inflation Reduction Act (IRA) green tax credits. Investors flock to firms positioned to capitalize on these policy tailwinds—often before the companies have proven operational viability.

For instance, carbon-capture startup ClimeOne raised US$1.8 billion on the promise of capturing one million tons of CO₂ annually. Three years later, its verified output was just 35,000 tons, while valuation remained unchanged. Similarly, green hydrogen ventures like HeliVolt and PowerCellX reported negative cash flows yet maintained multi-billion valuations due to “strategic alignment with decarbonization policy.” The system rewards signaling over substance.

The Data Mirage

The inflationary force behind ESG capital is data opacity. ESG ratings agencies such as Sustainalytics, MSCI, and Refinitiv often produce contradictory evaluations. A 2023 MIT Sloan study found only 0.42 correlation between major ESG rating systems—compared to 0.99 in credit ratings. This inconsistency enables “rating shopping”: startups selectively cite favorable assessments to attract investors.

Moreover, many ESG metrics focus on disclosure volume rather than outcome quality. A company publishing extensive sustainability reports may score higher than one achieving tangible reductions in emissions. As The Economist Intelligence Unit (2024) notes, “the reporting economy has outpaced the reform economy.”

Greenwashing 2.0: The Policy Paradox

Regulation, intended to fix ESG opacity, has inadvertently amplified it. The EU’s Sustainable Finance Disclosure Regulation (SFDR) requires funds to classify themselves into Articles 6, 8, or 9 based on sustainability integration. In response, over 70% of EU funds reclassified as “Article 8” by 2023 without altering investment portfolios. The rebranding inflated fund inflows by €280 billion while measurable impact remained static.

In the U.S., the SEC’s proposed ESG Disclosure Rule faces similar challenges. Without unified metrics, transparency mandates produce information overload rather than accountability. Investors equate disclosure with credibility, while startups weaponize compliance as marketing.

Economic Spillovers and Systemic Risk

The ESG venture boom’s speculative nature poses systemic risks. Credit Suisse’s 2024 Global Wealth Report warns that an ESG asset correction of 20–30% could erase US$2 trillion in paper wealth. This vulnerability stems from valuation clusters: 65% of ESG venture funding is concentrated in just five themes—carbon capture, electric mobility, hydrogen, renewable storage, and plant-based materials. Should any policy pillar falter, contagion could ripple across the ecosystem.

Meanwhile, the inflationary bubble distorts real climate progress. The International Renewable Energy Agency (IRENA) reports that while green investment grew 40% from 2020 to 2023, verified emission reductions rose only 6%. Capital is moving faster than carbon.

Deflating the ESG Hype Cycle

Preventing collapse requires shifting ESG evaluation from intent to impact. Governments and investors must converge on uniform accounting frameworks such as the International Sustainability Standards Board (ISSB) baseline. Funds should tie carried interest to verified performance, not self-declared metrics.

Emerging markets offer lessons in grounded ESG innovation. Kenya’s M-KOPA Solar and India’s Ecolibrium Energy achieved profitability while delivering quantifiable social impact under independent verification. Their success stems not from valuation inflation but from embedded accountability.

ESG venture capital must evolve beyond moral arbitrage. The next era of sustainable finance will belong not to firms fluent in green rhetoric but to those fluent in results. The true “impact unicorns” will be the ones whose carbon math survives an audit.

Works Cited

“Impact Investing Report 2024.” PitchBook Data, 2024. https://pitchbook.com

 “ESG Rating Correlation Study.” MIT Sloan School of Management, 2023. https://mitsloan.mit.edu

 “Global Impact Investing Market Overview.” Global Impact Investing Network (GIIN), 2024. https://thegiin.org

 “Carbon Border Adjustment Mechanism Fact Sheet.” European Commission, 2023. https://ec.europa.eu

 “Inflation Reduction Act Clean Energy Provisions.” U.S. Department of Energy, 2024. https://energy.gov/ira

 “Sustainable Finance Disclosure Regulation Statistics.” European Securities and Markets Authority (ESMA), 2023. https://esma.europa.eu

 “ESG Market Stability Report.” Credit Suisse Research Institute, 2024. https://credit-suisse.com

 “Global Energy Transition Report.” International Renewable Energy Agency (IRENA), 2024. https://irena.org

 “Global Wealth Report 2024.” Credit Suisse, 2024. https://credit-suisse.com

 “The Economist Intelligence Unit Green Finance Outlook.” EIU Reports, 2024. https://eiu.com