Every year, economic newspapers and conferences are flooded with information on the growth of sustainable investing. Since the United Nations started the Global Compact initiative, and with it issuing the “Who Cares Wins” report in 2005, investors increasingly included non-financial data in their valuations of investment opportunities. The report aimed to “to develop guidelines and recommendations on how to better integrate environmental, social and corporate governance issues in asset management, securities brokerage services and associated research functions”, which marked the birth of the ESG concept (defined by Essydo Magazine as: “The integration of environmental protection, socially acceptable behaviour and ethical governing systems into an organisation.”). Although sustainable investment was also present before 2005, the report constitutes a turning point in the approach of companies and investors towards matters related to the ESG concept.

At first glance, it is a promising development that corporations increasingly try to improve their ESG profile by implementing policies that support sustainability in business. Moreover, investors look to exert pressure on corporations to become ‘greener’. Obviously, marketing considerations are one of the main drivers, in an attempt to improve the corporate image. Accordingly, companies cannot stress enough how well they are doing in areas related to ESG. On the other hand, investors emphasise that they are greatly including ESG investment factors into their investment guidelines. Basically, everything that was criticised so much during the ’90s and ’00s slowly becomes reality.

However, it would be false to assume that this development does not have any downsides. In fact, sustainable economies face a great challenge with the quick rise of ESG implementation in the capital markets. And this is why: although the sustainable investing was put on the global agenda by a public organ (the UN), the later developments were mostly dynamic and are currently vastly unregulated. Hence, there are different standards of interpretation and implementation of ESG policies – in some markets it is still relatively unimportant. But there are also great internal discrepancies in various markets around the globe, because corporations are practically left alone in shaping their ESG profiles. Moreover, while it is acknowledged that ESG has become an immovable reality in investing, there is still great uncertainty around the concept, what it entails and how to implement it – both in academic and professional circles. Now, from a democratic point of view, this is a dangerous situation to be in moving forward. Since ESG matters are directly related to societal progress, citizens are directly affected by the quality of companies’ ESG output, which increases citizens’ importance as stakeholders to a company. In the end, the population as a whole is affected by matters such as climate change, income inequality, work safety and public health.

However, companies are not bound to any meaningful guidelines or standards of ESG implementation. Accordingly, there is a danger that companies might just select the most convenient ESG variables (for example, just publishing a yearly sustainability report), in order to display a favourable image of their company. For example, an oil & gas company might determine one of their assessment criteria for their ESG profile to be the reinvestment in environmental protection by a certain amount. Here, the company might just select a convenient amount, fulfil it and brand itself as an environmentally protective company, while other parameters might suggest otherwise. This is called greenwashing and is a destructive practice – especially in the long run. Of course, this is attractive for companies, as they get to improve their corporate image and marketing without incurring any significant costs. In an attempt to show the extent of this problem we can think of a very simple parameter: product life cycles. When did you ever encounter a company that focuses on prolonging their products’ life cycles to reduce waste? On the contrary, companies significantly reduce their products life cycles to generate continuous demand – see for example Apple, which is slowing down their devices after a certain period. Without any meaningful legislative framework, the increase of ESG investing only means that there is little change, while the public is developing favourable views on the corporate landscape as a whole.

On the other hand, there is a danger that one company, or a group of companies, manages to establish ESG guidelines, which are most convenient, which become a reference point for whole industries. Unfortunately, companies are not constitutionally bound to protect and further public interests. Just like a regular person, they are mainly driven by their own interests, which often times collides with the broader societal interests. Hence, establishing a ‘Gold Standard’ within an area that is directly tied to the societal good, is in direct conflict with democratic principles. Again, without a legislative framework, greenwashing might become institutionalised.

The development of ESG in sustainable investing is a great example of being cautious to accept at face value; it sounds great, but can be dangerous, if not put into a legislative frame. Considering the afore-mentioned points, there is a real risk of a democratic deficit, without anyone really noticing it. Therefore, we need the governments to step up and take a leading role in the furthering of ESG laws and stricter standards for environmental protection, socially acceptable behaviour and ethical governance in companies.