Environmental Social Governance (ESG) is subject to controversy since it exposes a corporation to external compliance factors unrelated to its real role and function; providing goods and services. The most notable issues include:
- Effectiveness. Are the ESG goals and criteria really reflective of sustainability? The benefits are not necessarily clear and more than often represent ideological judgments of value. Assessments about sustainability and environmental impacts in the past have been spectacularly wrong.
- Loss of focus. A corporation engaging in ESG is forced to consider a multiplicity of issues by pursuing metrics and meeting standards with unsubstantiated benefits based on inaccurate science, particularly the social and environmental components. By allowing leadership to partake in virtue signaling, ESG can incite a diversion of capital and efforts into activities providing limited value to the corporation and its customers.
- Legitimacy of rating agencies. ESG is not assigned by market principles but through compliance with rating agencies claiming legitimacy over the evaluation process. These agencies can be subject to ideological capture by advocacy groups and perpetuate their own biases that tend to be inclined toward socialism. This can create a sense of overreach in internal corporate matters by actors having no stakes in the outcome.
- Burden of reporting. ESG can be highly demanding in terms of metrics requiring resources to collect data. It can also devolve into an exercise of ticking boxes and falsifying or exaggerating outcomes. Further, ESG data is unlikely to be comparable across industries and even across corporations within the same industry.
- Lack of vision. ESG anchors evaluation perspectives into a mechanistic approach focused on compliance with the risk of overlooking real and transformative opportunities.
- Unfair competition. ESG can allow large firms to solidify their handhold on markets by preventing smaller or new firms from competing because of the imposed regulatory burden. In this context, ESG becomes a tool for monopolistic or oligopolistic behavior.