A reality check on ESG

This is our third report that measures the penetration of ESG in different sectors of banking and finance around the world.  The report analyses the public commitment of firms to ESG initiatives, and the value of ESG activity in different sectors, in the context of a wider ‘anti-ESG’ backlash over the past few years. It shows that while ESG in Europe is resilient, the most severe effects of the backlash are being felt in the US and Asia-Pacific.

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The state of ESG in banking and finance

In the 20 years since the term ‘ESG’ was first used to describe a framework to incorporate environmental, social, and governance issues in investing, ESG has grown to become an important part of banking and finance and now covers more than $30 trillion in assets across banking, asset management, insurance, and pensions.

But today ESG is at a pivotal moment. The new administration in the US has launched a full-frontal assault on the core principles of ESG. Financial services firms appear to be spooked by this ‘anti-ESG’ politicisation. And regulators in Europe are undertaking a ‘simplification’ effort to streamline complex sustainable finance regulation and seem to be suggesting that ESG may be conflicting with wider goals on global competitiveness and economic growth.

It would not be unreasonable to think that ESG is in deep trouble. That is why we are publishing this ‘reality check’ on ESG. It builds on our previous analysis from 2023 that benchmarked ESG in banking and finance. Our new analysis shows that while the public commitment to ESG has declined globally, European firms remain more committed than their peers in other corners of the world. And while the hard value of ESG financial activity is down from its peak in 2021, the overall growth over the past six years is strong and the market has proved surprisingly resilient in the past few years.

That said, the labelled loan market appears to be stagnating, and the sustainable fund market (which has grown exponentially since 2019) is seeing outflows globally. But ESG and sustainable finance remain an important part of the overall financial markets. Europe continues to lead on ESG, providing the region with an important competitive advantage in the capital markets.

This report shows how financial firms are implementing their ESG commitments and outlines what a more ‘sustainable’ framework for ESG could look like. It offers some directional questions for policymakers and other ESG stakeholders, and asks how can we ensure that the underlying principles behind  sustainable finance and ESG remain an important part of the financial industry in the years to come - even if ESG as a standalone sector recedes.

Here is a short summary of the report:

1. A challenging environment: in this report we outline the challenges facing ESG and sustainable finance in the context of a wider ‘anti-ESG’ backlash over the past few years. Those challenges include political uncertainty; complex regulatory frameworks; and tensions around the financial industry’s fiduciary duty.

   
   

2. A decline in commitment: the public commitment to ESG by financial services firms has declined since we last measured it in 2022. The regions with the greatest declines have been the US (-30%) and APAC (-20%). In Europe, the number of firms committed to at least one ESG initiative has dropped by 4%.

   
   

3. A resilient bond market: although the labelled bond market is below its 2021 peak in terms of value, it is up from where it was in 2019. The value of labelled ESG bond issuance has increased by more than $600bn in real terms from 2019 to 2024. In Europe, labelled ESG bond issuance makes up 13% of total European bond activity.

   
   

4. Europe’s competitive advantage? Europe maintains its leadership on ESG and other long-term, non-financial issues. It is the only area of the capital markets where Europe is a global leader. But European policymakers are performing a delicate balancing act in simplifying rules in order to boost economic growth while ensuring that guardrails for Europe’s sustainability objectives still exist.

   
   

5. A political problem: the new US administration has been behind much of the ‘anti-ESG’ rhetoric in recent months, but even before it took office the share of ESG capital markets activity originating from or taking place in the US was relatively small. ESG will run into problems when it does not play a bigger role in the largest capital markets worldwide.

   
   

6. Too green? A common criticism of ESG is that it is too much about environmental issues. This can best be seen in the labelled bond market, where nearly two-thirds of labelled financing is green bonds. While ‘green’ does need more financing (decarbonisation is very capital intensive), the fact that the ‘S’ and the ‘G’ receive less attention can undermine a more nuanced understanding of long-term issues.

   
   

7. Not enough ‘good’: companies that progress, rather than delay, ESG goals (such as solar farms or social housing providers) receive significantly lower financing on the capital markets than their conventional peers. Only 4% of capital markets activity globally is going towards these ‘good’ companies. For every dollar that was raised by a ‘good’ company in 2024, $24 went toward ‘business as usual’ companies.

   
   

8. Little engagement: financial firms, despite their often well-intended commitments to ESG, are not engaging enough with their portfolio members to set carbon emissions targets. Our analysis shows that less than half of the asset management industry is engaging with companies to set targets, while pensions and insurance companies are even further behind.

   
   

9. A silver lining? While ESG finds itself in a difficult place, the story isn’t all bad. The value of the assets of sustainable funds globally is larger than they have ever been, while public commitment to ESG initiatives is still higher than it was than when we first measured it in 2019.

   
   

10. A more ‘sustainable’ framework: to ensure that ESG remains an important part of the financial markets, policymakers and other ESG stakeholders need to rethink what a focus on non-financial issues really means. They could rework the concept of fiduciary duty; develop a financial system centred on the longer term; and work on a more nuanced narrative that shows how far ESG has come and what it has achieved.