Driven by a wave of scepticism from across the Atlantic, ESG is going through a crisis of confidence that is reshuffling the cards in sustainable investing. However, this backlash could push companies to go beyond compliance and make ESG a real lever for strategic transformation.

The roots of the ESG backlash

Between ‘green fatigue’ and a return to reality, ESG has been facing its own paradox for several years. The more essential it becomes, the more scepticism it arouses. Since its inception, ESG has claimed to offer a universal framework for assessing sustainability. But in reality, criteria vary from one country to another, from one sector to another and even from one player to another. As a result, two companies can achieve high ESG scores while having very different practices, fuelling confusion and mistrust.

Many companies publish detailed ESG reports without making any real changes to their business model. This disconnect between communication and action fuels accusations of greenwashing and undermines the credibility of the concept. Simplistic rhetoric and insufficient evidence have eroded confidence in certain ESG approaches, while the black-and-white view of net zero, diversity and fund labelling has created new reputational risks.

Furthermore, faced with the eternal debate over whether ESG funds outperform, many investors struggle to measure the materiality of the criteria used. Studies show that certain sustainability issues do generate long-term returns, but this does not necessarily mean that everything related to ESG will improve returns. If ESG is beneficial in the long term, why is its adoption perceived as a costly regulatory constraint?

When Europe regulates: ESG trapped by its own regulatory arsenal

There is little doubt that the EU, whose economy is stagnating, needs to reduce red tape. The regulatory jungle, with some 14,000 legal acts adopted between 2019 and 2024, has not helped. The cost of complying with the Corporate Sustainability Reporting Directive (CSRD) varies between €150,000 for unlisted companies and €1.5 million for listed companies. The Commission has proposed postponing the deadlines and exempting around 90% of the companies initially subject to the CSRD. Confusion reigns and is damaging the business climate in Europe. Large companies point out that it is difficult to provide ESG data on their supply chains if their suppliers do not play ball. Small businesses do not know whether to continue their data collection efforts or give up. Many fear that the Commission is rushing to appease – and imitate – the United States, which is currently undergoing a pro-business shift.

Necessary perspective: real or relative impact on flows?

The tense geopolitical environment, particularly with Donald Trump's return to the White House, has certainly weakened climate priorities and introduced legal risks for ESG strategies. These concerns have been more acute in the United States but are also gaining ground in Europe. In terms of concrete consequences for flows, the net outflows recorded in the first quarter of 2025 (-$8.6 billion) for ESG funds (according to Morningstar data) should be put into perspective.

The new European regulations on the naming of ESG funds clearly played a role here. Since November 2024 for new funds (and May 2025 for existing funds), ESMA has imposed strict criteria for the use of terms such as ‘ESG’, “sustainable” or ‘impact’ in fund names. For example, a fund can only use the word ‘sustainable’ if it invests at least 50% in assets considered sustainable. In addition, funds must exclude certain controversial sectors (arms, fossil fuels, etc.) in order to claim ESG status. Some investors have interpreted these adjustments as an admission of past greenwashing. This climate of caution has led to a decline in ESG fund assets, with fewer funds now available on the market. However, this outflow represents only 0.2% of total ESG fund assets, which puts things into perspective.

AI at the service of ESG: a strategic response to the current backlash?

Provided it is used to strengthen the rigour and traceability of companies' commitments, Artificial Intelligence can be a powerful lever for a sector undergoing rapid change.

AI has the advantage of speeding up sustainability analysis by quickly processing large data sets. However, it cannot replace human judgement, particularly when it comes to qualitative factors such as corporate culture, management intent or the credibility of carbon neutrality strategies. Successful investors will know how to combine AI with robust expertise in ESG integration: going beyond slogans to focus on nuance, transparency and rigorous data on material issues. In this context, AI appears to be a valuable tool.

In short, ESG is caught between its ambition for systemic transformation and the limits of its practical application. It is this tension that is fuelling the current backlash. While Europe and fund managers are not giving up on their climate ambitions, the US retreat from sustainable investing offers a window of opportunity for European managers, who are beginning to capture a growing share of the redeployed capital.

Completed on 03/07/2025

Why is ESG causing such a stir? Anatomy of a strategic shift

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