ESG

Working Definition

ESG (environmental, social, and governance) is a set of environmental, social, and corporate governance criteria that an investor or lender incorporates into the analysis of a company alongside traditional financial data. In its technical sense, rooted in capital markets, ESG is a risk category: it asks how climate change, labor law, supply-chain vulnerabilities, or board quality might hit a company's future cash flows. In everyday usage, by contrast, ESG is often taken to mean “good corporate behavior” or a firm's positive impact on the world. Most controversies surrounding the term stem from failing to distinguish these two directions: the world's risk to the company (financial materiality) and the company's risk to the world (impact materiality) are fundamentally different questions, even when answered under the same three-letter acronym.

Genesis and Global Lineage

The acronym entered circulation in 2004 with the report Who Cares Wins, prepared by a group of financial institutions at the invitation of the UN Secretary-General under the Global Compact. One year later, a landmark legal opinion by the law firm Freshfields Bruckhaus Deringer for the UNEP Finance Initiative concluded that integrating ESG factors into investment analysis is consistent with the fiduciary duty of asset managers handling other people's money—and in some cases is required by it. In 2006, the UN-backed Principles for Responsible Investment (PRI) were launched. Conceptually, ESG inherits from two older lineages: ethical screening and divestment campaigns (such as the anti-apartheid movement and the 1977 Sullivan Principles) and 1990s corporate management language, above all John Elkington's “triple bottom line” (people, planet, profit). What made ESG novel was its deliberate shift from ethics to risk: the core argument was no longer “this is the right thing to do,” but “this pays off or protects portfolios against loss.” From around 2015 onward, the concept was institutionalized by rating providers (MSCI, Sustainalytics) and the Financial Stability Board's Task Force on Climate-related Financial Disclosures (TCFD), before being partly captured by financial product marketing, where the “ESG” label often served sales rather than rigorous analysis.

Central European Lineage

We found no documented link between this concept and the intellectual history or historical experience of Central Europe.

Why Now

The years 2018–2026 mark both the peak and the fracturing of ESG. Capital inflows into ESG-labeled funds surged until 2021, accompanied by mounting accusations of greenwashing: in 2021, Tariq Fancy, BlackRock's former chief investment officer for sustainable investing, called ESG a dangerous placebo that lulls regulators into inaction, and in 2022 Florian Berg, Julian Kölbel, and Roberto Rigobon demonstrated empirically that ESG ratings from different agencies diverge sharply. Starting in 2022, a coordinated anti-ESG campaign in the United States—featuring state laws barring asset managers deemed to “boycott” fossil fuels and the withdrawal of major asset managers from climate coalitions—turned the acronym into a partisan political marker, to the point that large funds stopped using the term altogether. In parallel, the European Union moved toward hard regulation: the Corporate Sustainability Reporting Directive (CSRD, 2022) expanded mandatory sustainability reporting to thousands of companies across Europe, only for the European Commission's 2025 Omnibus package to narrow that scope amid competitiveness concerns. Meanwhile, the US Securities and Exchange Commission adopted climate risk disclosure rules in March 2024 and subsequently ceased defending them in court, while the International Sustainability Standards Board (ISSB), established at COP26 in 2021, issued its IFRS S1 and S2 standards in 2023, absorbing the TCFD framework. Today the concept is indispensable not as a slogan, but as an analytical knife to separate what in ESG is genuine risk measurement, what is public policy by proxy, and what is mere marketing.

Explanatory Power

The ESG framework makes visible how costs that for decades remained external to a company's financial statements return through other doors: insurance premiums, cost of capital, litigation exposure, and access to supply-chain contracts. Three concrete examples illustrate its reach. First, consider an energy utility holding coal-fired assets: an “E” analysis highlights the risk of “stranded assets” whose book value will not survive climate policy, long before a loss registers on the current income statement. Second, take a gig-economy platform: the “S” pillar reveals that the entire business model hinges on worker classification, and thus on a single court ruling or legislative change. Third, look at a listed company controlled by the state treasury or a founder's family: the “G” pillar warns that a minority shareholder is buying not just a claim on earnings, but also the risk of strategic decisions made outside the boardroom to serve political or private goals. Across all three cases, ESG introduces not a new morality, but a longer time horizon for valuation.

Axes of Debate

Underappreciated Angle

The least examined link in the ESG chain is the letter “G,” even though governance determines whether the rest means anything at all. An environmental or social score is only as credible as the internal accountability for the underlying data and the consequences for falsifying it; where a supervisory board is a mere facade and a dominant shareholder—whether the state treasury, a founder, or a holding group—makes the real decisions offstage, “E” and “S” pledges become declarations without an addressee. For Central and Eastern Europe, this insight carries acute practical weight: because a large share of companies listed on regional exchanges (such as the Warsaw Stock Exchange) have a controlling state or private shareholder, the most consequential part of any ESG analysis concerns not emissions disclosures, but who actually governs the firm and how minority investors are protected. Seen in this light, the rating divergence documented by Berg, Kölbel, and Rigobon is not just a methodological flaw in weighting metrics, but a symptom of rating agencies' inability to measure corporate power.