Just a few years ago, Environmental, Social, and Governance (ESG) investing was hailed as the future of finance. Asset managers reshaped portfolios around sustainability metrics, regulators tightened disclosure mandates, and companies rushed to highlight their green and ethical credentials. But in 2025, the ESG movement finds itself at a crossroads, facing growing backlash, skepticism, and political controversy.
This backlash is most pronounced in the United States, where several states have introduced laws limiting or penalizing ESG investing, accusing it of promoting “woke capitalism” at the expense of fiduciary duty. As of April 2025, at least 11 U.S. states, including Florida, Texas, and Idaho, have passed anti-ESG legislation. High-profile asset managers like BlackRock have come under fire from both sides of the political spectrum: progressives accuse them of greenwashing, while conservatives criticize them for promoting climate ideology. The result is a fractured discourse where ESG is simultaneously seen as too radical and too weak.
While this backlash may appear localized, its implications are global. For sustainable investors, especially in emerging markets like India, the changing winds in ESG sentiment signal a need to reassess the strategy, language, and frameworks that have guided impact investing so far.
To understand the backlash, we must examine the dual pressures confronting ESG investing. On one hand, there is a growing demand for transparency and accountability. Investors and regulators want clear, quantifiable metrics for ESG performance. Yet ESG data remains patchy, inconsistent, and sometimes contradictory across rating agencies. This has led to accusations of greenwashing and eroded trust in ESG-labelled funds.
On the other hand, ESG investing has become entangled in ideological and political battles. In the US, conservative lawmakers argue that ESG funds prioritize climate and social issues over financial returns, violating fiduciary principles. As a result, some pension funds are being barred from investing in ESG assets, and several asset managers are rolling back public climate commitments to avoid legal or reputational risk.
This backlash is also driven by macro events such as the energy shocks from the Russia-Ukraine war, inflation, and volatility in clean energy stocks. Critics argue that ESG funds underperform during crises, while traditional oil and gas investments have delivered windfall profits. The market narrative, once favorable, has become more cautious.
For sustainable investors in countries like India, the ESG backlash in the West is not just a headline. It has strategic consequences. Global capital flows are interconnected, and shifts in ESG perceptions in the US and EU affect emerging markets through fund allocations, index rebalancing, and investor mandates.
If ESG-labelled funds shrink or reorient, sectors such as renewables, EVs, and climate tech in the Global South may find it harder to raise capital, despite strong fundamentals. Similarly, Indian firms trying to align with global ESG frameworks may find that goalposts are shifting, or that Western models fail to fully capture local realities such as informal labor, just transition, or climate adaptation.
Yet, this moment also presents an opportunity. With the ESG brand under scrutiny, investors can refocus their approach around materiality, integrity, and impact. Instead of treating ESG as a checklist, they can embed sustainability into core financial risk analysis, particularly in areas like climate resilience, water stress, and governance quality, issues that are highly relevant in the Indian context.
The most constructive response to the ESG backlash is not retreat. It is reform. The future of sustainable finance lies not in abandoning ESG, but in redefining its value proposition. This means moving away from superficial scores and embracing a more data-driven, sector-specific, and regionally grounded approach to risk and opportunity.
Investors should prioritize double materiality: understanding not just how ESG factors affect financial performance, but how companies affect people and the planet. In markets like India, this could mean integrating climate vulnerability maps into real estate investments, assessing water footprints in industrial zones, or factoring human rights compliance into global supply chains.
Likewise, regulators and policymakers can help by standardizing disclosure requirements, supporting ESG data infrastructure, and incentivizing impact-linked financing. India’s Business Responsibility and Sustainability Reporting (BRSR) framework, now mandatory for the top 1,000 listed companies, and the RBI’s evolving climate risk guidelines are steps in this direction. The Securities and Exchange Board of India (SEBI) has also introduced rules governing ESG ratings and disclosures, building investor confidence in credible ESG data.
As ESG undergoes a credibility test, impact measurement will take center stage. Investors are no longer content with broad claims. They want evidence of outcomes. Has the fund reduced emissions? Improved worker conditions? Enabled clean mobility or circular economy practices?
This will require stronger tools for outcome-linked finance, from sustainability-linked loans to transition bonds and blended finance structures. It will also demand third-party verification, transparent data pipelines, and investor education.
In India and across the Global South, where climate risk intersects with poverty, infrastructure deficits, and social inequality, the case for ESG remains strong. But it must be built on credibility, contextualization, and capital discipline.
The ESG backlash is real, but it is not the end of sustainable investing. It is, in many ways, a course correction. For investors, this is a time to move beyond labels and toward authentic, long-term value creation.
As emerging economies rise and the climate crisis deepens, sustainability is not a “theme.” It is a risk-adjusted lens for navigating the future. The smart money will follow transparency, not trends. And those who stay the course, rooted in clarity and commitment, will not only weather the backlash but also lead the transition that follows.
This context underscores the need for leaders who can translate ESG complexity into actionable Net Zero strategies. Programs like PG Executive Program in Net Zero Strategy & Sustainability Leadership, offered by IIM Kashipur and evACAD, are designed to prepare professionals for exactly this challenge. Covering areas such as climate finance, ESG accountability, carbon markets, and clean energy transitions, the program equips participants with the knowledge and tools to lead organizations through uncertainty and shape the sustainable economy of tomorrow.
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