ESG investment funds—funds that consider factors related to a company’s environmental, social and governance (ESG)-related performance—are frequently described and marketed to investors as sustainable and socially responsible. 

If ESG investing lived up to this promise, it could be a powerful force for good—harnessing enormous public demand for responsible investment options and using it to incentivize corporate accountability and more responsible business conduct. 

But the experiences of communities harmed by corporations that continue to reap the financial and reputational benefits of ESG investment show that the promise of ESG is far from the reality. 

The company profiles in the ESG Watch database demonstrate that high ESG ratings and ESG investment are routinely bestowed on companies alleged or known to have contributed to massive social and environmental harm while doing little to remedy that harm or prevent future damages. 

Companies benefitting from ESG investment and related reputational benefits include notoriously destructive and abusive mining operations, companies funding and equipping Myanmar’s repressive and genocidal military regime, and developers of some of the largest and riskiest new fossil fuel projects in the world.

When companies implicated in serious human rights abuses secure high ESG scores and a spot in ESG investment funds, it does more than direct “responsible” investment to the wrong place (diverting what could otherwise be a useful tool to incentivize better corporate behavior), it also makes it harder to hold some of the worst corporate offenders accountable. 

A high ESG rating and inclusion in ESG investment indexes and funds serves as a stamp of approval, suggesting that a company is abiding by international standards for human rights due diligence and responsible business conduct. When misapplied, this greatly undermines the efforts of communities and human rights defenders to secure redress for corporate abuses—in part because it makes it much harder to convince investors, consumers and other stakeholders to use their leverage to compel a corporation to take corrective action.

This “ESG washing” is a result of systemic issues that are pervasive in the ESG investing industry. 

Asset managers such as Blackrock, Vanguard and others bear significant responsibility, and should be held accountable for marketing ESG-labeled funds as sustainable and responsible when they are not. 

But the problem also goes deeper. 

Most ESG funds are based on ESG investment indexes, lists of companies that meet certain ESG-related criteria. These indexes are based on ESG ratings, which are meant to reflect a company’s performance across a range of environmental, social and governance indicators. The firms that publish these ratings and create the indexes serve as gatekeepers to the illustrious and lucrative world of ESG investment. That role gives them enormous leverage with companies. They have a responsibility to use that leverage to prevent and mitigate human rights abuses (e.g., by requiring that companies that have caused harm take remedial action, and downgrading or removing them from their indexes if they fail to do so). Unfortunately, they almost never do. 

The ESG problem cannot be solved until ESG rating and index providers are held accountable. 

Read more here about the role of these firms—including industry leaders MSCI, FTSE Russell and S&P Dow Jones Indices—and the steps they need to take to ensure that ESG investing can honestly be called responsible investing.