The Policy Illusion: Why ESG Ratings Are Failing to Redirect Global Capital

By George Clark May 24, 2025

In 2024, over US$41 trillion of assets were managed under environmental, social, and governance (ESG) mandates, according to the Global Sustainable Investment Alliance (GSIA 2024). Yet, global carbon emissions still hit record highs. This paradox—record “sustainable” investing alongside worsening planetary outcomes—reveals a deeper failure: ESG ratings have become performative metrics that mask inaction behind a veneer of responsibility.

The Promise and the Problem

ESG was designed as capitalism’s conscience—a system to channel private finance toward public good. But its architecture is flawed. ESG scores aggregate disparate indicators—carbon intensity, board diversity, community relations—into a single number, as if ethics could be averaged.

A MIT Sloan Sustainability Initiative (2024) study found that correlations between the same firm’s ESG scores across major rating agencies (MSCI, Sustainalytics, S&P Global) averaged only 0.54, compared to 0.99 for credit ratings. Two agencies can call the same company both “sustainable” and “high-risk.”

This divergence stems from incompatible methodologies. Some emphasize disclosure (what is reported), others performance (what is achieved). The result: an illusion of accountability without consequence.

Green by Numbers

The quantitative veneer of ESG creates perverse incentives. Companies learn to optimize scores, not sustainability. In 2023, oil majors like Shell and BP maintained “A” ESG ratings despite expanding fossil fuel output, because they improved board diversity and published climate reports.

According to the Columbia Center on Sustainable Investment (CCSI 2024), 43 percent of ESG-linked funds invest in fossil fuel or mining firms. Meanwhile, less than 10 percent of ESG assets directly finance renewable projects. ESG has become a branding exercise for capital already seeking returns—not a redirection of it.

The Governance Mirage

Governance—the “G” in ESG—was intended to ensure ethical leadership. Instead, it legitimizes financialization. Many corporate boards now treat ESG as risk management, not reform. As Harvard Business Review (2024) notes, “ESG integration often measures exposure, not impact.”

This subtle shift matters. Measuring exposure to climate risk protects investors; measuring impact on climate protects society. The two are not the same—and ESG’s dominance of the former ensures its failure on the latter.

The Politics of Metrics

ESG ratings are not neutral—they reflect the politics of those who define them. Western agencies privilege disclosure and governance structures that align with liberal capitalist norms, penalizing developing economies where data is scarce.

The OECD Policy Forum (2024) warns that ESG metrics “systematically undervalue emerging markets,” even when actual sustainability outcomes—like renewable energy share or pollution reduction—are superior. As a result, African and Latin American firms face higher capital costs despite lower per-capita emissions than their Western peers.

ESG thus reproduces global inequality under the guise of green progress.

Financial Alchemy: The Rise of “ESG Alpha”

In financial circles, ESG is now sold as a source of “alpha”—excess returns from sustainability. But this framing transforms ethics into arbitrage. Asset managers repackage ESG funds not as moral commitments but as volatility hedges. The Morgan Stanley Institute for Sustainable Investing (2024) found that 73 percent of ESG ETFs outperform benchmarks due primarily to tech-sector overweighting, not sustainability performance.

In other words, ESG returns are accidental, not ethical.

The Regulatory Reckoning

Regulators are finally noticing. The European Securities and Markets Authority (ESMA 2025) now requires fund managers to disclose the share of “sustainable investments” in numerical terms. The U.S. SEC Greenwashing Enforcement Taskforce (2024) fined several firms, including Goldman Sachs Asset Management, for mislabeling ESG products.

Yet enforcement remains reactive. Ratings agencies remain unregulated, shielded by the disclaimer that ESG is “opinion, not fact.” This loophole allows them to influence trillions in investment decisions without accountability.

Rebuilding the Framework

The ESG crisis is not one of intent but of design. To make sustainable finance truly sustainable, reform must focus on three pillars:

1. Outcome-based metrics – Link ratings to measurable impact (emission reduction, community benefit) rather than self-reported disclosures.

2. Unified global standards – Harmonize methodologies under multilateral oversight, as proposed by the International Sustainability Standards Board (ISSB).

3. Transparency in weighting – Require agencies to publish exact formulae and weight distributions to prevent score manipulation.

The Financial Stability Board (FSB 2024) estimates that unified standards could redirect US$3.5 trillion annually toward genuine low-carbon assets.

The Future Beyond ESG

ESG was supposed to humanize finance. Instead, it has financialized virtue. The next phase of sustainable capitalism will require moving beyond ESG altogether—toward impact accountability, where investors earn not just returns but responsibility.

The challenge is clear: replace the rating with reality. Because the planet does not grade on a curve.

Works Cited

“Global Sustainable Investment Review.” Global Sustainable Investment Alliance (GSIA), 2024.

 “Sustainability Metrics and Correlation Study.” MIT Sloan Sustainability Initiative, 2024.

 “Greenwashing in Global Finance.” Columbia Center on Sustainable Investment (CCSI), 2024.

 “ESG Integration and Governance.” Harvard Business Review, 2024.

 “Policy Forum on ESG and Emerging Markets.” Organisation for Economic Co-operation and Development (OECD), 2024.

 “Institute for Sustainable Investing Report.” Morgan Stanley, 2024.

 “Green Finance Enforcement Updates.” U.S. Securities and Exchange Commission (SEC), 2024.

 “ESMA Sustainable Finance Directive.” European Securities and Markets Authority (ESMA), 2025.

 “Global Financial Stability and ESG Reform.” Financial Stability Board (FSB), 2024.

 “International Sustainability Standards Framework.” International Sustainability Standards Board (ISSB), 2024.