Has ESG Investing a future as a contributor tofinancing sustainable development?
16 January 2023
Fall 2022 Essay competition winners go to Luxembourg
24 January 2023

How to instrumentalize ESG
to achieve sustainable

By Kitti Fodor

This essay is one of the winners of the Fall 2022 Chair’s Essay Competition on the topic of: “Has ESG Investing a future as a contributor to financing sustainable development?” 


According to the United Nations (2022), sustainable development means “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” It also adds, that for such development to be achieved, we must harmonize economic growth, social inclusion and environmental protection, which are interrelated elements. In this regard, ESG investment, which is the acronym for Environmental, Social and Governance measures, should align substantially with the objectives and policies of sustainable development. But do they? This essay will shred light to the role of ESG in sustainable financing, a key instrument and indicator of the progress on sustainable development, and the achievement of Sustainable Development Goals (SDGs).

ESG as a term appeared as early as 2004, however, thoughts on the relation between investment and its social and environmental impacts dates back at least as far as the 1990s, when Elkington called economic, social and environmental factors the “triple bottom line” (Fulwood, 2022; Singhania & Saini, 2021). It actually evolved from the concept of Corporate Social Responsibility (CSR), and the “E”, “S” and “G” norms were initially not practiced in a holistic view but separated from each other. The synchronization, and the understanding of the interconnectedness of these fields, however, also resonates more with the holistic view of the SDGs – which even though came more than a decade later – also include social, environmental and governance elements. Despite such associations, ‘sustainable investment’ is more interchangeable with SRI (Sustainable, Responsible and Impact) investments, than ESGs. Some sources argue that Sustainable finance is a broader, less tangible definition, and ESG is more focused, with specific goals under its subcategories (Niemoller, n.d.). Others argue that ESG only aims to make the portfolio of a company ‘less bad’, with the risk of controversial activities, partial solutions, trade-offs between different goals which are often paired with the term of greenwashing. Such activities, clearly, are not efficient for sustainable development, but they can arguably be regarded as a first step to decrease the costs of externalities caused by the company. In contrast, companies with truly sustainable portfolios deliberately partner with suppliers who are making a positive difference by their activity (Krull, 2022). Even though ESG is often addressed with criticism, there are several reasons this could also become a tool for sustainable development. The next parts of this paper, therefore, will deliver on the purpose, challenges and the potential policy implications related to ESG finance.

The interests of the business sector in ESG, and criticism on its armlength

In the past half a century, the role of the business sector has grown immensely, as trade relations became increasingly liberalized, more and more transnational and multinational companies were established, who even individually contributed more and more not only to the economic performance of countries, but also to the well-being of the societies – or the lack thereof. The power of the corporate world, therefore, has become influential enough, that their governance decisions can influence the lives of thousands or hundreds of thousands – taking into account the direct and external effects of their activities in the lives of their employees or the local impacts of a factory, for instance.

In the 1970s, economist Milton Friedman went so far to state that companies’ sole role should be making profit, and they should not be concerned with their environmental, social and broader economic impacts. In that era especially, long-termism was not really present on the agenda of decision-makers, however, partly due to the increased interdependence caused by globalization, and its connection with the globally tangible impacts of climate change and environmental problems, the role of human society or nature cannot be separated from the activities of companies anymore. A recent example of that is the Covid-19 pandemic, but the growing number of extreme weather events should also be alerting (Coyle, 2022). These events especially shift the focus of investors and raise attention to the dangers and vulnerabilities their current practices could suffer from, for instance, the decrease in the value of assets – which is categorized as a physical climate risk (Adrian, 2022). In this respect, ESG can be regarded as a simply form of long-term risk management in protection of owned assets (Fulwood et al., 2022). By today, the physical destruction of their properties has clearly become a threat to resilience, but the survival of companies is more pressured by another factor: society.  According to the legitimacy theory mentioned by Singhania and Saini as a root behind the emergence of ESG, societies will only allow the survival of companies which align with their values (2021). One of the reasons ESG could become significant element in sustainable development, is that currently it is the most widespread form of sustainable finance, and it is becoming an increasingly influential factor in competitiveness of firms. That is why, despite the lack of standardization frameworks, companies independently from state policies, re-evaluate their own role and legitimacy in the society, investing more and more into sustainable targets (Coyle, 2022).

Yet, it is important to note, that investment into sustainable development often involves high risk, high upfront capital invested, long timeframes and increased country and project risks, particularly in places where most progress needs to be made – in emerging markets and developing economies (EMDEs). Therefore, in many cases, ESG remains an investment in already developed countries, where transaction costs are also lower, or it happens with trade-offs between social and environmental targets due to the high costs of one cause. Although, there is enough capital and liquidity to close investment gaps, the risk levels discourage many companies to place their money into the most sustainable projects available (Adrian, 2022).

Another issue regarding ESG disclosures, is that there is no globally binding or agreed standards, which makes the comparison of different firms’ ESG practices very difficult. There are, on the other hand two frameworks which are followed by many: the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB), but in many countries they are still not adopted officially. On this account, we must, therefore, recognize the role of global and national governments in coordinating the efforts of both the public-private, and the national-global axis to incentivize more efficient and accountable corporate measures (Singhania & Saini, 2021).

How does this affect global sustainable development? Despite the increase in absolute amount of development aid, for several decades public investment stagnates around 0.3% of national GNI, which is becoming increasingly insufficient due to the growing needs of adaptation and mitigation schemes in developing countries. If we governments cannot guarantee a sudden and significant increase in the aid they provide, foreign direct investment (FDI) must gain an increased role. For this objective, however, especially with regard to sustainable investment, global and national policies are necessary to mitigate the perceived and real risks which are often associated by investors with less developed countries. There are already some important measures taken by governments in this direction, such as the BUILD act in the United States, or the Joint Regulatory Technical Standards on ESG Disclosure Standards in the European Union, the latter of which only takes effect in 2023 – but they both provide a framework to harmonize ESG investments. The BUILD Act, enacted in 2018, also aims to limit risks of companies investing in overseas sustainable projects, serving an example for global trends.  (Smith, 2021; EBA, 2022; Proskauer, 2022)

This chapter has provided insight into the reasons and frameworks behind the current ESG trends, as those are indispensable to examine when we are looking into the future projections of the policy.

Policy implications and possible solutions

As a conclusion, this paper argues that ESG is not a perfect or a single solution for financing sustainable development, but a necessary one. It does not have the capacity, and governments are not supposed to outsource the responsibility to create a just and sustainable world to private companies (Coyle, 2022). However, given the amount of capital in the hands of the private sector, their societal and environmental impacts and the historical responsibility of the sector in unsustainable practices, they must invest into projects which benefit the environment, the society and are governed in a just way. The flaws and lack of credibility given to many ESG practices is something that would have a conflict of interests for the business world, as the long-term survival of its entities is now strongly linked to value-based perceptions, therefore, those must receive stronger governance by international entities, as well as the effort of coordination from national governments. SRI still has the potential to overcome the impacts of ESG investment, but by increasing due diligence rules, improving disclosure standards, developing green taxonomies similar to already existing ones in the EU, or standardizing products, SRI and ESG could both boost significantly the negative externalities of corporate activities – partly by lessening the bad, and partly by increasing the good and sustainable exposure of their portfolios. (Guérin & Suntheim, 2021; Krull, 2022).

Society and media also have strong roles in pressuring fake and superficial ESG investors into more radical and impactful actions. In this context, the popularization of deep ESG could be a potential solution  to more impact (such as in the case of SRI), and more comprehensive corporate policies, as the term refers to (especially private equity) investments which use ESG metrics integrated into the core of commercial cycles instead of adding ESG as a supplementary practice which would provide additional confidence level, and thus an increased legitimacy to the firm who applies it (Long & Johnstone, 2021).


Adrian, T. (2022, April 26). Shaping The Frontier of Sustainable Finance in Emerging Markets. IMF. https://www.imf.org/en/News/Articles/2022/04/26/sp-042622-shaping-the-frontier-of-sustainable-finance-in-emerging-markets

Coyle, D. (2022, February 15). The Revolution Will Not Be Privatized: Corporate Responsibility and Its Limits. Foreign Affairs. https://www.foreignaffairs.com/articles/world/2021-12-14/revolution-will-not-be-privatized

European Commission Formally Adopts the Consolidated Regulatory Technical Standards (RTS) Under the Sustainable Finance Disclosure Regulation (SFDR) and Taxonomy Regulation – Insights – Proskauer Rose LLP. (2022, April). Proskauer. https://www.proskauer.com/alert/european-commission-formally-adopts-the-consolidated-regulatory-technical-standards-rts-under-the-sustainable-finance-disclosure-regulation-sfdr-and-taxonomy-regulation

Fulwood, A., Keynes, S., Bird, M., Fancy, T., Woll, L., & Tricks, H. (2022, July 20). Money talks: The backlash against ESG. https://www.economist.com/esg-pod

Guérin, P., & Suntheim, F. (2021). Firms’ Environmental Performance and the COVID-19 Crisis (Economics Letters 109956).

Joint Regulatory Technical Standards on ESG disclosure standards for financial market participants. (2022, September 30). European Banking Authority. https://www.eba.europa.eu/regulation-and-policy/transparency-and-pillar-3/joint-rts-esg-disclosure-standards-financial-market-participants

Krull, P. (2022, January 4). ESG Investing Is Not Sustainable Investing. Forbes. https://www.forbes.com/sites/peterkrull/2022/01/04/esg-investing-is-not-sustainable-investing/

Long, F. J., & Johnstone, S. (2021). Applying ‘Deep ESG’ to Asian private equity. Journal of Sustainable Finance &Amp; Investment, 1–19. https://doi.org/10.1080/20430795.2021.1879562

Niemoller, J. (n.d.). Sustainability vs ESG: What’s the Difference, and Why Does It Matter? https://www.perillon.com/blog/sustainability-vs-esg

Singhania, M., & Saini, N. (2021). Institutional framework of ESG disclosures: comparative analysis of developed and developing countries. Journal of Sustainable Finance &Amp; Investment, 1–44. https://doi.org/10.1080/20430795.2021.1964810

Smith, G. E. (2021, March 5). Development Depends on More Than Aid: A New U.S. Agency Promises to Harness the Power of Private Investment. Foreign Affairs. https://www.foreignaffairs.com/articles/united-states/2021-03-01/development-depends-more-aid

United Nations. (2022, July 26). The Sustainable Development Agenda. United Nations Sustainable Development Goals. https://www.un.org/sustainabledevelopment/development-agenda/