July 2022
Environmental, Social and Governance (ESG) approaches have fundamentally restructured financial investment over the past 20 years. However, the effectiveness of ESG approaches is difficult to measure, hampered by a lack of strict, regulated, and unifying disclosure framework. Accusations of ‘greenwashing’ – claiming an ESG approach without any meaningful action, have become more frequent.

The proliferation and complexity of ESG reporting has led to a lack of auditing practices, comparability, and trustworthiness in ESG disclosures.  Despite more companies claiming ESG approaches, global emissions and social inequity are rising. So are ESG approaches even working? How can we measure their effectiveness?


What are ESG Approaches?

ESG approaches are business and investment strategies that factor environmental considerations such as decarbonisation, social considerations such as labour rights, workplace standards, safety and diversity, and governance considerations such as transparency and minority shareholder rights.



The ESG concept was coined in 2004 by the UN Secretary and the UN Global Compact in the Who Cares Wins initiative and endorsed by 23 financial institutions collectively representing over US$6 trillion in assets.

Since 2004, ESG assets have grown sharply, reflecting the increased investment into decarbonisation, social and governance outcomes. ESG assets have grown 30% annually for the past five years and totalled US$35 trillion in 2020. At a 15% growth rate, ESG assets will exceed US$50 trillion by 2050 – a third of total global assets under management.



Europe has traditionally comprised most of the world’s ESG assets; in 2016, the region held US$12 billion in ESG assets, 52% of global assets. However, the United States has been rapidly increasing its ESG assets over the past five years; its share in ESG assets was US$17 billion in 2020, 48% of global assets. Europe’s share has remained stable, while Canada, Australia and Japan have increased their assets.


Environmental Considerations

Environmental considerations within ESG approaches include CO2 emissions (Scope 1 and 2), waste produced, energy used, and water withdrawn.

Environmental considerations have increased corporations’ understanding of climate change as a risk and opportunity, environmental innovation and emission reduction.

They have also influenced investor behaviour; a study performed by the Harvard Business Review across 43 global institutional investing firms found that ESG concerns are a priority for investors, with environmental performance being the most frequently raised issue.

The value of environmental concerns in investment has been validated by the consistent outperformance of companies with high environmental ratings over companies with low ratings.

Environmental considerations for countries and corporations were reinforced by the 2015 Paris Climate Agreement, that promulgated decarbonisation, sustainable development and environmental integrity.


Social Considerations

Social considerations within ESG approaches include labour standards, pay rates, safety, workers’ rights, ethics and corruption, diversity, equality and inclusion.

The UN’s Sustainable Development Goals outline social considerations for countries and corporations, including health, education, equality, employment and social protection. However, there is a lack of specific, quantitative framework to measure social considerations.

Despite social considerations being directly linked to risk in a company’s financial performance, investors prioritise both environmental and governance considerations over social ones – possibly because of the lack of quantitative measurement framework.


Governance Considerations

Governance considerations within ESG approaches include transparency and disclosure, minority shareholder rights, board structure, diversity and effectiveness, codes of conduct and tax strategy.

Governance considerations increase the accountability of companies, and their ability to respond to stakeholder preferences,

Like both environmental and social considerations, high ratings on governance considerations have been linked to positive financial performance.



ESG by Region: Europe

The EU has been the leading proponent of ESG approaches since 2004. In 2005, the EU commenced its Emissions Trading System, which places national caps on emissions and allows emissions allowances trading.

In 2018, the European Commission published the Financing Sustainable Growth action plan that created ESG benchmarks and put in place measures to enhance ESG transparency and disclosure. This aligned with benchmarks created in the Paris Agreement in 2015.

The Financing Sustainable Growth plan focused on environmental considerations and set out five objectives: climate change mitigation and adaptation; the sustainable use and protection of water and marine resources; the transition to a circular economy; pollution prevention and control; and the protection and restoration of biodiversity and ecosystems.

Under the Financing Sustainable Growth plan, companies must disclose ESG factors, allowing benchmarking and a consolidated ESG rating. This then influences investment decisions.



United States

In 2020, the US had the most ESG assets under management, these were valued at US$17 billion, and surpassed Europe. The Securities and Exchange Commission (SEC) sets the US’ disclosure processes and benchmarking.

Environmental disclosures were first set by the SEC in the 1970s and were updated in 2010 to provide information to investors. In March 2022, the SEC released an updated Climate Disclosure Rule Proposal, the broadest federally mandated ESG data disclosure requirement for corporations in the US.

The Climate Disclosure Rule Proposal mandates disclosures on the oversight and governance of climate-related risks, the impact of climate risks on finances, outlook or business model, transition plans and climate strategies, GHG emissions, emissions goals and internal carbon pricing.

The Proposal, despite having extensive mandated environmental disclosure practices, does not contain practices for social or governance disclosures. It aims at simplifying disclosure practices for corporations and enabling investors to incorporate environmental risk into their investment decisions.

The Proposal has since been subject to public feedback and has received criticism over its Scope 3 emissions disclosure requirement and its elimination of the materiality qualifier – whether the disclosure materially affects the environment – for certain disclosures. It is expected that the Proposal will face further legal challenges.



Canada emerged as the leader in 2020 when it comes to measuring the proportion of Sustainable Investing, relative to the total assets managed. Canada currently counts 61.8% of its total assets as Sustainable Investment Assets.

Responsible Investment Association (RIA) has been collaborating with several other institutions and organisations to come up with initiatives to promote the transition to a low carbon economy. However, Canada accounted for 7% of the total Sustainable Investing Assets, 3.1 trillion Canadian Dollar in value.

The gradual rollout of mandatory ESG disclosure is coming to Canada in 2024, and so are legal risks for companies that fail to meet disclosure requirements.

In April 2022, the federal government tabled its latest budget, which included a number of measures aimed at achieving a net zero economy, as well as a promise to bring mandatory climate-related reporting requirements to federally regulated banks and insurance companies.

Beginning this year, the Office of the Superintendent of Financial Institutions (OSFI) will consult with banks and insurers on developing climate disclosure guidelines that adhere to the Task Force on Climate-related Disclosures framework.



In 2016, the People’s Bank of China, the China Security Regulatory Commission (CSRC) and five other agencies released the Guiding Opinions on Building a Green Finance System, an incipient environmental disclosure system.

This was followed by the Cooperation Agreement on Jointly Developing Environmental Information Disclosure of Listed Companies in 2018, which formally established the disclosure system. These systems are concomitant with China’s ambition to reach peak carbon by 2030 and net-zero by 2060.

In 2020, 1,021 Chinese A-share companies published annual ESG reports, compared to 371 companies in 2009. However, China’s overall ESG disclosure scores remain low. There is no unified standard for disclosure, and information disclosed is often incomplete or not credible. As in the US, there is a lack of social and governance considerations in disclosures.



Japan increased their ESG assets sixfold between 2016 and 2020, despite Japan having no regulations that mandates ESG disclosures and investing. In 2021, the Financial Services Agency of Japan issued the Building a Financial System that Supports a Sustainable Society report, which called for greater ESG reporting by companies and for specific ESG regulations to be mandated.

Japanese companies have invested heavily in decarbonisation; Japan has pledged to reach net-zero by 2050, and there has been a 40% reduction in energy intensity of GDP from 1970. Electrification and decarbonisation in Japan’s power and industry sectors – Japan’s two largest emitting sectors – will drive Japan’s environmental approach.

However, Japan has low scores for social considerations. Despite a high level of safety in Japanese companies, extremely long working hours, inflexible working styles and strict culture make labour conditions poor. There is also poor gender diversity in Japanese companies, which ranked 121st out of 153 in the World Economic Forum’s gender-gap rankings. In 2018, the Japanese Government passed the Work Style Reform Bill to address these issues.



Like Japan, Australia has no overarching ESG regulation, but separate disclosure mandates set by commonwealth, state and territory governments. The National Greenhouse and Energy Reporting Act of 2007 set up reporting practices for companies, as well as a range of renewable energy and emission reductions targets.

Australia has consistently lagged on environmental action; in the 2020 Climate Change Performance Index, Australia ranked last of all 57 participating countries with the worst possible score of 0.0 out of 100. Australia’s environmental performance may improve following its recent elections; the new government has already increased its emissions reduction target to 2030 to 43%, up from 26-28% from the previous government.

43% of ASX200 companies made ESG disclosures reports in 2021 – an increase from previous years, though still low by international standards. 80 ASX200 companies adopted recommendations from the Task Force on Climate-Related Financial Disclosures relating to emissions and environmental impact disclosures.

The Australian Securities and Investments Commission (ASIC) regulates Australian corporations and financial markets and has made disclosures on environment and governance approaches a focus for 2022 – without releasing any specific disclosure mandates.


ESG Effectiveness and Criticism

The financial effectiveness of ESG approaches is validated by the demonstrated outperformance of companies with high ESG ratings over those with low ones. However, the environmental and social effectiveness of ESG approaches is more difficult to measure.

This partially arises from the difficulty of measuring some ESG factors over others; Scope 1 and 2 emissions, for example, can be easily quantified and monetised in the form of carbon prices, but other factors, such as Scope 3 emissions, or impacts on ecosystems, cannot.

Social and governance factors are likewise hard to quantify; though studies have shown that diverse and gender-equal management teams make better decisions, quantifying the effect of diversity is difficult.

Despite a dramatic increase in ESG approaches by companies, carbon emissions and social inequity have continued to rise. The Harvard Business Review found that ESG disclosures are often incomplete, imprecise and misleading – a type of ‘greenwashing’ in which companies claim an ESG approach without taking meaningful action. This is not helped by the lack of any regulated and unified disclosure framework.

Auditing practices for ESG disclosures are almost non-existent; despite many companies producing ESG reports, very few are validated by third parties. Companies also have discretion over what ESG disclosure practice to follow.

ESG definitions are incredibly broad, and factors disclosed vary between regions. The variability in disclosure practices by companies then creates a lack of comparability that undermines investor trust in ESG disclosures.

If ESG reporting in developed regions is specious and complex, then it is almost completely ignored in developing nations – areas such as India and Africa, in which the largest increase in emissions will come over the next decade.

The social effectiveness of ESG approaches is also extremely difficult to measure. A study from the University of Zurich found little evidence to suggest that ESG approaches make meaningful change for workers or communities. Instead, the majority of social investing was into funds that stay away from specific industries – tobacco and weapons – to create ‘social benefit’.

There are also criticisms that ESG approaches focus on minor ESG improvements that do not alter the wider business structure – changing the office lights to LEDs rather than rearranging the value chain of a product.

In order for ESG approaches to be effective, there must be a paradigm shift from wealth-accrual to environmental and social wellbeing. This will require a restructuring of the market as a whole – most likely through public policy. ESG reporting must become simpler, lesser, and unified to allow greater transparency and avoid ‘greenwashing’.

Environmental targets must be not only aimed at restricting emissions and impacts, but also at limiting growth to within nature’s capacities. But given that limiting growth is antithetical to market competition, ESG approaches may continue to be broadly ineffective for some time.