Responsible Investing: Progress, Pitfalls and the Path Ahead | By Adam Aoun

EHL Hospitality Business School held the third edition of the Sustainable Investment Forum in June 2025, focusing on shareholder engagement as an essential driver of sustainable strategies. This article shares insights on what responsible investing is, exploring today's challenges, potential solutions, as well as what the future could hold. Parts of the findings of this article were presented during the Forum.

What is Responsible Investing?

The term responsible investing is often used interchangeably with concepts such as sustainable investing or ESG investing. But what do these terms actually mean?

• Responsible investing: an umbrella term for investment approaches that consider not only financial returns but also environmental and societal outcomes.
• ESG investing: focuses on incorporating specific Environmental, Social and Governance factors (e.g., carbon emissions, labor standards and board diversity) into financial analysis and portfolio decisions.
• Impact investing: goes a step further, aiming to generate measurable positive impact while garnering financial returns.

Regardless of which word you use, these approaches represent an evolution from the older concept of Socially Responsible Investing (SRI), which began in the 1960s as value-based screening (excluding tobacco, alcohol, arms, etc. from one’s portfolio). ESG reframed this field of investing by emphasizing risk management and long-term value creation.

Responsible investing has gone mainstream and is projected to reach USD 40 trillion by 2030, or nearly one-third of global assets under management (Bloomberg Intelligence, 2023).

Such future growth is remarkable. But has it really transformed markets? The answer, so far, is mixed.

The Promise Versus the Reality

The rapid expansion of ESG products suggests a financial revolution is afoot. Pension funds, insurers and private equity firms now offer “sustainable” funds. Asset managers increasingly market themselves as guardians of stakeholder interests including social and environmental considerations.

Yet beneath this narrative lie contradictions: inconsistent ratings, weak enforcement, high-profile scandals and structural incentives that still favor polluting industries.

Unless addressed, these weaknesses could relegate ‘sustainable investing’ to a mere buzzword rather than a transformative practice.

The Problems of Responsible Investing

1. Confusing ESG ratings

Investors expect ratings to cut through the complexity. Instead, ESG ratings often do the opposite. Berg, Kölbel, and Rigobon (2022) show that correlations between leading ESG rating providers average just 0.54, much lower than the consistency of credit ratings, where agencies typically assign the same or adjacent grades to the same issuer.

Bissoondoyal-Bheenick et al. (2024) demonstrate that this divergence reflects fundamental differences in scope, weighting and methodology. One provider may reward disclosure, another actual outcomes. One may prioritize carbon intensity, another labor standards. The result is that a company can rank as a leader in one dataset and a laggard in another.

This lack of comparability undermines the very purpose of ESG data.

2. Greenwashing and credibility gaps

Without consistent standards, companies can emphasize what flatters them and downplay what doesn’t. Several scandals highlight the risks:

• Volkswagen (2015): Marketed “clean diesel” while secretly installing emissions-cheating software.
• Goldman Sachs (2022): Fined by the U.S. SEC for failing to apply its own ESG fund policies.
• DWS (Deutsche Bank’s asset manager, 2022): Raided by German police for overstating ESG integration.

Such cases show why voluntary ESG claims, without enforceable auditing, can come across as a cynical marketing ploy. As Kräussl et al. (2024) note, investors often overestimate the rigor and underestimate the inconsistency of current ESG practices.

3. The performance paradox

ESG is often marketed as a win-win: investors can “do well by doing good”. Yet the evidence is foggy. A review by the NYU Stern Center for Sustainable Business (2021) of over 1,000 studies found that 58% of those studies report positive links between ESG and financial performance, 21% neutral, and 13% negative. In short, literature points in no single direction.

More recent studies (Dsouza et al., 2025) show ESG improvements can enhance firm value and investor returns in OECD countries, but only when paired with regulation and investor scrutiny. ESG, in other words, is not a guaranteed driver of returns. Its benefits are highly contextual.

4. Misaligned incentives

Perhaps the greatest contradiction lies in global markets themselves. Despite ESG’s rise, fossil fuels remain heavily subsidized by national governments, to the tune of over USD 7 trillion in 2022 (International Monetary Fund, 2023). Polluting industries therefore remain financially attractive, which puts them at an advantage with investors.

Why Regulation Matters

Another core issue is measurement. Unlike accounting, where unified standards such as IFRS or US GAAP ensure comparability, ESG disclosures remain fragmented. Companies can cherry pick ESG reporting, often emphasizing metrics that show them in a favorable light.

The European Union has taken the lead in addressing this gap:

• The Corporate Sustainability Reporting Directive (CSRD), phased in from 2024, requires thousands of companies to disclose sustainability data according to the standardized European Sustainability Reporting Standards (ESRS). They include the concept of double materiality, i.e. firms must report on both how sustainability issues affect them and how their corporate actions impact society and the environment.
• The Corporate Sustainability Due Diligence Directive (CSDDD), implemented from 2024, obliges large firms to identify, prevent and mitigate human rights and environmental harms across their supply chains.
• A new EU regulation on ESG ratings (2024) requires rating providers to disclose methodologies and address conflicts of interest, bringing oversight to a sector long criticized for opacity.
• Yet politics has led to compromise (or caving, depending on your read of the situation). In 2025, the European Commission introduced an “omnibus” proposal to simplify CSRD obligations, raise reporting thresholds and delay deadlines for smaller firms (Deloitte, 2025).

These developments represent both ambition and realism. Europe is raising the bar but also learning how challenging large-scale sustainability reporting can be.

What Needs to Change

1. Unified measurement

The first requirement is clear, comparable standards. Just as accounting rules prevent companies from reporting profits in whatever format that suits them best, ESG needs its equivalent. Without harmonization — ideally at a global level through convergence between CSRD and ISSB standards — responsible investing will remain fragmented and open to abuse.

2. Enforceable accountability

Disclosure alone is insufficient. ESG claims must be verified, audited and enforced. The fallout from the Volkswagen, Goldman Sachs and DWS scandals made one thing clear: without penalties, greenwashing — or downright cheating — thrives. As with financial reporting, misleading sustainability reporting should carry legal and pecuniary consequences.

3. Investor mindset shift

Finally, investors themselves must shift expectations. Responsible investing is not a free lunch. It requires grappling with trade-offs, between short-term returns and long-term resilience, between fiduciary duty and societal responsibility. As Kräussl et al. (2024) argue, the responsible investor mindset is built less on formulas than on the ability to ask critical questions.

The Road Ahead

Responsible investing has grown rapidly in scale but still struggles with credibility issues. Conflicting ratings, recurring scandals and systemic incentives that favor incumbent polluters all highlight the gap between promise and practice.

Closing that gap requires three shifts: unified global standards, enforceable accountability, and a more critical investor mindset. ESG needs to do what accounting rules did for financial transparency, namely foster widespread uptake of stringent international standards. Only then can responsible investing move from buzzword to something investors and the public at large can truly believe in.

References

Ahmad, H., et al. (2023). Environmental, social, and governance-related factors for business investments and sustainability: A literature review. Frontiers in Psychology, 14, 112233. https://doi.org/10.1007/s10668-023-02921-x

Bayat, A., Qu, R., & Rahmani, Z. (2025). ESG Rating Uncertainty: Causes, Consequences and Potential Remedies. SSRN working paper. https://doi.org/10.2139/ssrn.5238193

Berg, F., Kölbel, J., & Rigobon, R. (2022). Aggregate confusion: The divergence of ESG ratings. Review of Finance, 26(6), 1315–1344. https://doi.org/10.1093/rof/rfac033

Bissoondoyal-Bheenick, E., et al. (2024). ESG rating disagreement: Implications and aggregation. International Review of Financial Analysis, 94, 102828. https://doi.org/10.1016/j.iref.2024.103532

Council of the EU. (2024). ESG ratings: Council greenlights new regulation. https://www.consilium.europa.eu/en/press/press-releases/2024/11/19/environmental-social-and-governance-esg-ratings-council-greenlights-new-regulation/

Deloitte. (2025). Omnibus proposal: EU sustainability reporting obligations simplified. https://dart.deloitte.com/USDART/home/publications/deloitte/heads-up/2025/eu-commission-omnibus-proposal-sustainability-reporting-reduction-csrd

Dsouza, S., et al. (2025). Sustainable investing: ESG effectiveness and market value in OECD countries. Cogent Economics & Finance, 13(1), 2445147. https://doi.org/10.1080/23322039.2024.2445147

International Monetary Fund. (2023). Fossil fuel subsidies database. IMF.

Kräussl, R., et al. (2024). A review on ESG investing: Investors’ expectations, beliefs and perceptions. Journal of Economic Surveys, 38(3), 721–746. https://doi.org/10.1111/joes.12599

NYU Stern Center for Sustainable Business. (2021). Uncovering the Relationship by Aggregating Evidence from 1,000 Plus Studies Published between 2015–2020. https://www.stern.nyu.edu/sites/default/files/assets/documents/NYU-RAM_ESG-Paper_2021.pdf