WATER AND WASTEWATER POINT

The ESG Illusion: Reclaiming Impact Over Optics

High ESG scores dazzle. But beneath the glow, rivers are poisoned, workers exploited, and communities erased from the narrative. What began as a beacon for ethical business now risks becoming its mask. This article dismantles the illusion—revealing how ESG, when stripped of integrity, rewards disclosure over justice. If ESG is to guide the future, it must move beyond performance theater and toward lived accountability.

Introduction—ESG at a Crossroads

Environmental, Social, and Governance (ESG) criteria have been heralded as a seismic shift towards ethical business practices, aiming to redirect capital to foster sustainable development across industries. Initially conceived as a mechanism to hold companies accountable and drive societal benefits, ESG has evolved into a framework that, paradoxically, can often celebrate intent over actual impact. This paradoxical nature of ESG is particularly highlighted in recent literature, revealing a growing frustration that the current implementations of ESG are too focused on optics rather than genuine outcomes. Several studies underscore the idea that the promise of ESG is being undermined by the superficiality of corporate reporting and the manipulation of performance metrics to create pleasing narratives for investors while neglecting true sustainability efforts (Clementino & Perkins, 2020)(Chebbi & Ammer, 2022; .

One of the critical failings of the ESG model is its tendency to reward firms for their commitment to social responsibility without a rigorous verification of the actual impact. Researchers suggest that companies frequently adopt an "opportunity-seeking" stance, actively conforming to ESG ratings to gain a competitive advantage while sometimes engaging in practices that are fundamentally antithetical to ESG principles (Clementino & Perkins, 2020). This aligns with claims made by more recent studies illustrating that many corporations are effective at marketing their ESG credentials but less successful at implementing practices that engender significant, positive societal or environmental outcomes (Aboud & Diab, 2018; (Chebbi & Ammer, 2022; .

Moreover, the disparity between ESG disclosures and real-world impacts poses substantial ramifications for stakeholders, particularly investors. Studies suggest that retail investors often struggle with assessing the moral implications of corporate behaviors closely tied to ESG criteria, emphasizing that meaningful engagement with ESG issues substantially influences investment decisions (Nafisa et al., 2023). Therefore, there is a pressing need to overhaul the current ESG frameworks to prioritize genuine transparency and engage more directly with the communities affected by corporate actions (Chebbi & Ammer, 2022; .

1. The Mechanisms of ESG Ratings and Corporate Behavior

The correlation between how corporations respond to ESG ratings and their genuine practices illustrates a complicated landscape. It is often the case that companies manipulate ESG metrics to convey a false image of their sustainability efforts Zeng et al., 2025). This greenwashing poses significant challenges when assessing actual corporate performance against community expectations and environmental needs. For instance, certain companies, while scoring well on ESG metrics, have contributed to environmental degradation through practices that conflict with their publicly stated commitments (Aboud & Diab, 2018; Zeng et al., 2025).

Moreover, the plurality of ESG standards available can lead to inconsistencies and lack of comparability across firms, fueling confusion among consumers and investors alike (Lee & Rhee, 2023). Such discrepancies on what constitutes 'acceptable' behavior under various ESG metrics create room for companies to exploit the gaps and present themselves favorably without meaningful accountability Duan et al., 2023). Consequently, this has raised alarms within the academic community, pushing for a more coherent and standardized approach to ESG that better reflects the actual performance (Chebbi & Ammer, 2022; Piccioni et al., 2024).

2. ESG Disclosures: Validity and Impact on Firm Value

The literature points to diverging findings regarding the impact of ESG disclosures on firm value, demonstrating both their capacity to attract investment as well as criticisms regarding the authenticity of such disclosures (Aboud & Diab, 2018; Arvidsson & Dumay, 2021). Some studies affirm that positive ESG practices correlate strongly with enhanced firm value, as they can lead to lowered risks and increased attractiveness to socially conscious investors (Li & Chengshu, 2023). However, the quality, consistency, and validity of these ESG disclosures remain contested among scholars and practitioners alike (Aboud & Diab, 2018; Arvidsson & Dumay, 2021).

This creates a ferocious cycle where companies, incentivized to project a favorable ESG image, may prioritize superficial disclosures that meet stakeholder expectations but do not genuinely reflect their operational realities (Zhang & Liu, 2024). Such a dynamic calls for stricter scrutiny and regulation in the realm of ESG to prevent exploitative practices and reinforce accountability. Moreover, engaging stakeholders in discussing ESG criteria, in ways that prioritize community welfare and ecological integrity, could serve as a disruptive corrective to existing paradigms (Abdullah et al., 2024).

3. The Evolving Nature of Corporate Accountability Through ESG

As the field continues to evolve, the integration of ESG performance metrics into executive compensation packages is a prominent trend. Stakeholders suggest that tethering executive remuneration to ESG results can motivate corporate leadership to prioritize sustainable practices and stakeholder welfare over short-term profit maximization (Ahmed et al., 2024; Yin, 2024). This approach seeks to align corporate strategies with broader social and environmental goals in a manner that does not merely seek to 'tick boxes' but instead works towards substantial improvements in company practices. In doing so, it could address some of the criticism surrounding the current ESG frameworks (Ahmed et al., 2024; Ge et al., 2022).

Furthermore, the integration of technological advances, such as artificial intelligence and blockchain, offers significant potential for enhancing transparency in ESG-related data. Emerging frameworks propose utilizing these technologies to validate claims made by companies about their ESG initiatives, potentially leading to a more robust and trusted approach to corporate responsibility (Liu et al., 2024; Espahbodi et al., 2019). Such innovation signals an opportunity for the establishment of a more equitable relationship between corporations, investors, and communities, facilitating a shift from aspirational goals to actual accomplishments in the realm of ESG.

4. The Role of Stakeholders and Broader Society in Shaping ESG Outcomes

For ESG frameworks to reach their full potential, a reevaluation of how businesses engage with their stakeholders is paramount. Stakeholder theory emphasizes the necessity of involving all parts of society, encompassing not just shareholders but also employees, customers, and local communities, in the decision-making processes of corporations (Kostyuchenko et al., 2024). Studies show that robust stakeholder engagement is directly correlated to lasting corporate success and sustainability outcomes, as it encourages companies to address the needs and expectations of their wider environment authentically (Zhang & Liu, 2023; Cheng et al., 2022).

In practice, this can manifest through engaging local communities in corporate strategies, enriching the dialogue surrounding equity and sustainability, and ensuring that ESG priorities align closely with authentic societal needs rather than purely corporate interests or opportunism (Sætra, 2021; Yu et al., 2024). By firmly rooting ESG in community engagement and transparency, companies can break free from the prevailing illusion of compliance that currently pervades corporate practices.

5. Reforming the ESG Framework: A Path Forward

Reforming the ESG framework is not merely a desired goal; it is an urgent necessity if the sustainability movement is to thrive sustainably. This reform would entail a shift towards more rigorous standards that not only assess corporate behavior based on intent but critically evaluate the actual impact of such behavior on society and the environment (Wang, 2024). By strictly evaluating and ranking companies based on transparent impact assessments, rather than self-reported metrics, stakeholders can forge a path toward achieving the core goals of ESG (Kim & Li, 2021; Wang et al., 2024).

Moreover, collaboration across sectors will play a crucial role in actualizing impactful ESG outcomes. Governments, NGOs, and business leaders must work together to establish a unified approach that drives commitment and facilitates robust reporting standards that protect communities and the environment (Teng et al., 2021; Duan et al., 2023). This united effort has the potential to rewrite the narrative of ESG from one of superficial engagement to one of profound societal contribution and accountability.

In conclusion, while ESG holds considerable promise in reshaping corporate governance and pushing for a more sustainable and equitable future, the current practices heavily skewed towards optics must be addressed. This entails a reconstruction of ESG's foundational tenets to encompass authentic, measurable impacts and stakeholder-driven decision-making processes, fostering an era of transformative social responsibility.

Chapter 1 – The Illusion of Integrity: When Scores Conceal Harm

1.1 High Scores, Low Ethics – The Optics Trap

In the contemporary landscape of Environmental, Social, and Governance (ESG) ratings, it has become increasingly evident that high scores can be misleading indicators of actual corporate performance. Instead of reflecting true adherence to ethical practices, many organizations achieve impressive ESG ratings by prioritizing superficial compliance over substantive action. This phenomenon, often described as the "optics trap," allows companies—particularly those in high-polluting sectors—to present polished images by selectively disclosing favorable information or by showcasing diversity statements while continuing practices that are detrimental to environmental sustainability and social justice Wong et al. (2022).

Such distorted representations shield corporations from reputational damage that could arise from more profound ethical failings, ultimately exacerbating issues such as environmental degradation and social inequities. Research has shown that companies can amplify their ESG scores through strategic disclosures that prioritize appearance over impact—this not only erodes the credibility of ESG evaluations but also deepens systemic injustices related to labor practices, environmental compliance, and community displacement (Clementino & Perkins, 2020; (Escrig‐Olmedo et al., 2019). In many instances, the ethical implications of actions are overshadowed by the compelling narratives constructed around ESG achievements, allowing corporations to evade accountability while masquerading as socially conscious entities (Shobhwani & Lodha, 2023).

Therefore, if ESG frameworks are to serve their intended purpose, they must prioritize ethical considerations over mere optics. Transparency should outrank image cultivation; otherwise, the very instruments designed to promote accountability risk becoming tools of deception (Escrig‐Olmedo et al., 2019). The central question remains: how can stakeholders, including investors and consumers, discern genuine commitment to ESG principles from calculated posturing? This inquiry underscores the urgency for reform in how ESG ratings are assessed and communicated, pushing for a model that rewards authentic actions and real outcomes rather than polished reports.

1.2 The Metrics Mirage – Disclosure Without Accountability

The lack of uniformity in ESG rating methodologies contributes significantly to the current crisis of credibility regarding corporate disclosures. Rating agencies differ markedly in how they evaluate ESG performance, making it easier for companies to engage in selective data representation that favors their interests (Ruan & Liu, 2021). For example, a corporation may receive high praise for its emissions disclosures while simultaneously perpetuating practices like forced labor or contributing to deforestation in other regions (Narula et al., 2024).

This "metrics mirage" obscures systemic injustices, primarily when financial materiality takes precedence over ethical accountability. While corporations strive for higher ESG ratings to attract investment and public favor, the underlying issues often remain hidden from scrutiny. Studies indicate that without a standardized framework for assessment and severe repercussions for misleading disclosures, ESG ratings can mislead stakeholders concerning a firm's genuine commitments (Aich et al., 2021; Sundoro et al., 2025). The lack of independent verification further complicates matters, allowing firms to possibly furnish inflated data to sway perceptions while failing to enact fundamental changes in their operational practices (Wang, 2024).

If ESG is to realize its potential as a transformative force within corporate governance, it must transcend the current limitations imposed by a fragmented metrics system. By instituting stringent standards, transparent verification processes, and holding companies accountable for their performance against actual impacts—rather than self-reported data—the industry can promote a more authentic connection between ESG ratings and the realities faced by communities and the environment alike (Ye et al., 2023). Ultimately, addressing fundamental flaws in disclosure paradigms will empower stakeholders to make informed decisions and tangibly hold corporations accountable for their ESG commitments.

1.3 Beyond the Numbers – Double Materiality and Ethical Depth

A robust solution to the current issues within ESG reporting lies in the adoption of the concept of double materiality. This approach evaluates not only how environmental and social risks influence financial performance but also how corporate activities impact societal inequities and ecological systems (Tan et al., 2025). Specifically, organizations should be assessed not solely on how diversity is represented in their workforce but also on the inclusivity of their practices and decision-making processes. Additionally, environmental impact assessments should extend beyond a corporation’s headquarters to include the practices of outsourced suppliers (Li et al., 2022).

Double materiality addresses the limitations inherent in traditional ESG evaluations by recognizing the interconnectedness of financial performance and broader societal and environmental implications. It emphasizes the necessity for companies to engage with stakeholders—employees, local communities, and advocacy groups—whose lives and environments are directly affected by corporate operations (Teng et al., 2021). By incorporating feedback mechanisms to understand the perspectives of impacted groups, organizations can better align their practices with the aspirations of sustainable development and social equity.

Implementing this frame of reference demands a transformation in corporate culture, shifting from a narrow focus on financial success to a more comprehensive appreciation of societal wealth. Real reform is contingent upon listening to the voices of workers and the communities they inhabit, thereby fostering genuine accountability in corporate practices that resonate with the original aspirations for ESG (Feng et al., 2022). The challenge remains: how to catapult the discussion of ESG beyond mere compliance and into deeply rooted ethical commitments that yield meaningful societal benefits.

1.4 Case Spotlight & Reflection – ESG Failure in Practice

Consider a prominent global oil company, which might receive an "AA" ESG score while simultaneously engaging in lobbying efforts against climate policy and violating Indigenous land rights. This contradiction exemplifies the discrepancy in how ESG ratings are often attributed based on self-reported disclosures rather than accountable outcomes. The focus placed on how risks are disclosed can overshadow the urgent necessity for tangible risk reduction measures to protect both natural environments and social constituencies (Indriani, 2024).

The initial inception of ESG was meant to align corporate practices with social justice imperatives. However, as it stands, many firms take advantage of the ease of crafting self-congratulatory reports that reflect a priority on perception rather than action. Consequently, lack of integrity in reporting diminishes the spirit of accountability that ESG aims to embody. Until there is a decisive movement towards fortifying integrity—prioritizing authentic ethical action over mere appearances—ESG is likely to remain a diluted construct, failing to realize its transformative potential.

This chapter serves to underscore the path of reform that must take place within existing ESG frameworks. By establishing a foundation built on ethical integrity, standardized metrics, and genuine community engagement, stakeholders can reclaim the essential principles that ESG was originally designed to uphold. Moving forward, the focus must be on creating systemic changes that promote real, measurable impact rather than superficial accolades, bridging the gap between corporate responsibility and societal accountability.

Chapter 2 – From Compliance to Convenience: How ESG Lost Its Soul

2.1 The Birth of the Box-Ticking Culture

The evolution of Environmental, Social, and Governance (ESG) practices has often begun within organizations as a responsive measure focused primarily on regulatory compliance. Many companies find themselves in a phase where the primary aim of ESG initiatives is to produce reports that satisfy regulators rather than genuinely address stakeholder concerns. This box-ticking culture emerges when ESG becomes an isolated function, delegated mainly to communications or sustainability departments, and not fully integrated into the organization’s strategic framework Lo & Kwan (2017). As a result, initiatives are typically designed to merely pass audits, fostering a milieu where compliance is valued over systemic transformation.

This approach can result in superficial adherence, where companies emphasize meeting the minimum requirements of ESG standards without committing to deeper, meaningful changes that might actually benefit their communities or the environment. Such practices foster a corporate culture that is more about appearance than performance, undermining the original intent of ESG to drive ethical behavior and accountability (Feng et al., 2024). Studies indicate that this manner of engagement often fails to cultivate a transformative agenda in organizations, perpetuating an environment where real issues remain unaddressed (Ramirez et al., 2022; .

The consequences of this compliance-driven approach can be detrimental. Organizations that view ESG as merely a compliance exercise risk not only their reputations but their long-term viability as stakeholders increasingly demand transparency and genuine commitment to sustainability (Nafisa et al., 2023). The challenge ahead is for businesses to reframe ESG engagement beyond mere compliance, integrating these principles deeply into their core strategies and operations so that they can generate real impact rather than just appeasing auditors.

2.2 The Responsive Stage – Where Many Stop

In the landscape of ESG deployment, many organizations find themselves comfortably ensconced in the "responsive stage," where the goal is to do just enough to meet regulatory mandates without advancing their ESG agenda or critically assessing the implications of their practices. As regulations evolve—such as the European Union's Corporate Sustainability Reporting Directive (CSRD) and the SEC’s new proposed rules—it has become increasingly clear that a responsive approach now presents reputational and financial risks (Possebon et al., 2024). Stakeholders, particularly investors, are no longer satisfied with paperwork; they demand integrated governance practices that reflect authentic commitment to ESG principles.

The imposition of more stringent regulations has sparked a shift in expectations. Companies that remain stagnant in their efforts to fulfill ESG obligations now face risks that can significantly affect their business operations and market perceptions. Research has indicated that there is a correlation between high ESG performance and reduced costs of capital, which makes a compelling business case for companies to fully embrace robust ESG strategies instead of simply adhering to baselines for compliance (Ramirez et al., 2022; Teti et al., 2022). However, many companies still cling to outdated approaches, fearing that genuine integration will reveal operational inefficiencies or expose uncomfortable truths about their practices.

The integration of a more comprehensive ESG framework enables organizations to navigate these emerging regulations effectively and capitalize on changing market dynamics favoring transparency and genuine ethical commitment. In doing so, companies can mitigate financial risks while enhancing their reputations among increasingly conscientious consumers and investors (Aleknevičienė & Stralkutė, 2023). Ignoring these evolving demands risks relegating organizations to the sidelines in a growing global economy where sustainability and corporate responsibility are intertwined with business success.

2.3 Bureaucracy Over Purpose – When ESG Becomes Hollow

As organizations continue to prioritize compliance over purpose, ESG initiatives often devolve into bureaucratic theater. This phenomenon is characterized by a repetitive cycle of data collection, reporting processes, and obligatory board meetings, executed with little introspection or genuine impact on the company’s operations or culture (Zeng et al., 2025). When ESG practices are disconnected from leadership and decision-making processes, their potential to influence procurement, research and development, or operations is severely diminished.

The result is a hollow representation of corporate social responsibility, where reports are generated and filed with little meaningful analysis or commitment to the values they purport to represent (Ramirez et al., 2022; Liu et al., 2024). Firms may produce sustainability reports that are rich in information and data but lack the critical narratives that connect those figures to real-world impacts. Research has shown that without a genuine connection to the corporate culture, such reporting often becomes a mere formality rather than a chance for organizations to reflect on their practices and strive for improvement (Zhang et al., 2024).

Moreover, this compartmentalized approach tends to create a disconnect between ESG initiatives and core business strategies, rendering sustainability discussions peripheral rather than fundamental to decision-making processes. When ESG becomes symbolic rather than actionable, organizations risk alienating employees, customers, and investors who seek companies that embody integrity and purpose. To reverse this trend, there needs to be an intentional effort to integrate ESG considerations into all facets of corporate strategy (Feng et al., 2022). Doing so would reaffirm the importance of sustainability within the company culture and, as a consequence, invigorate the overall ambition of ESG with a renewed sense of meaningful purpose.

2.4 Section Reflection – The Rise and Dilution of ESG

The initial promise of ESG was to align capital with conscience, allowing consumers and investors alike to support companies that demonstrated genuine responsibility and commitment to environmental and social justice. However, despite the emergence of organizations boasting high ESG ratings, many have still been associated with striking abuses and environmental damage. The inquiries into the dissonance between reported scores and actual practices reveal that the current landscape of ESG metrics favors ease of compliance over ethical robustness (Leng et al., 2023; Lisin et al., 2022).

The comfort derived from having high scores and the associated accolades from rating agencies can often serve as a dangerous mask, obscuring the ethical violations and harmful practices being overlooked. Without tying ESG performance to meaningful impact and systematic integration across all corporate arms, ESG risks diluting its original mission, which set the stage for authentic accountability and socially responsible growth (Markopoulos et al., 2023; Halbritter & Dorfleitner, 2015).

Ultimately, organizations must shift from a mindset of compliance to one of integration, creating a cultural and operational embedding of ESG principles. This transition won't only necessitate a reevaluation of how ESG is perceived but will also require a cogent effort to reassess how it is implemented. Reflecting on the core values of ESG can guide stakeholders back to the foundation of aligning business objectives with societal values, emphasizing the ethical imperatives over mere numerical scores. Only then can ESG regain its integrity, reflecting a commitment to impact rather than optics alone.

Chapter 3 – The Paradox of ESG Success

3.1 When High Scores Hide Low Ethics

The current state of Environmental, Social, and Governance (ESG) ratings reveals an alarming dilemma: firms that achieve high ratings, such as "AA," may simultaneously engage in unethical practices like funding deforestation, profiting from exploitative labor, or evading taxes. In this context, ESG scoring allows corporations to prioritize strategic image management over genuine reform. The outcome is stark; while investment portfolios may gleam with green accolades, ecosystems may suffer significant degradation, and marginalized communities face undue hardships Cheung & Lai (2023)Possebon et al., 2024).

Numerous studies illustrate that the superficial allure of high ESG scores often conceals deeper ethical failings within organizations. Companies have manipulated reporting structures to reflect favorable metrics while continuing harmful operations behind closed doors (Clementino & Perkins, 2020; Şahin et al., 2022). This phenomenon leads to a critical paradox in ESG implementation. The illusion of accountability perpetuated by inflated ESG ratings enables harmful corporate behaviors to flourish under the radar, overshadowing actual contributions to sustainable practices (Annisa & Hartanti, 2021).

As this paradox deepens, the reputation of ESG as a catalyst for change is jeopardized. Stakeholders may feel misled, as the purported benchmarks of ethical corporate behavior fail to translate into meaningful action. For ESG to reclaim its integrity and true purpose, it must be recast as a tool designed for genuine accountability rather than as a commodified success that distracts from pressing realities of corporate misconduct (Niblock, 2024; (Dzyuma-Zaremba, 2023).

3.2 The Black Box of ESG Ratings

The opacity of ESG criteria and the presence of bias in ratings render ESG scores unreliable metrics for assessing corporate responsibility. The inconsistencies in rating methodologies mean that companies adept at crafting compelling narratives can often outscore organizations that are instigating genuine change (Назарова & Лаврова, 2022; Shobhwani & Lodha, 2024). This reliance on self-reported, unverified data not only detaches ESG assessments from actual community experiences but also favors companies that prioritize superficial compliance over substantive action (Dzyuma-Zaremba, 2023).

The implications of this black box approach to ESG ratings are profound. As companies skillfully navigate the rating landscape by providing selective disclosures that favor their images, the disconnect between ESG performance measurement and real-world impact widens. This dynamic highlights how ESG systems disproportionately protect the interests of those with the resources to engage in effective public relations while sidelining the needs of stakeholders who deserve accountability (Halid et al., 2023; Liu et al., 2023).

To break free from the constraints of this black box, robust frameworks must be developed that provide transparency in rating methodologies and establish standardized criteria for assessing ESG efforts across sectors. Such reforms would enable stakeholders to access credible and comparative information, empowering them to make informed decisions based on both ethical practices and genuine corporate behavior (Indriani, 2024).

3.3 Metrics That Miss the Moment

Many existing ESG frameworks prioritize criteria that are simple to quantify—such as policy presence and disclosure frequency—at the expense of assessing fundamental justice, resilience, and the tangible harms inflicted on communities and ecosystems (Madison & Schiehll, 2021; Gidla & Kumar, 2024). As climate crises intensify and social inequalities expand, the disconnect between ESG ratings and the realities unfolding outside of boardrooms becomes increasingly pronounced. The current system rewards compliance without necessarily holding companies accountable for the real consequences of their actions (Gao et al., 2022).

The predominance of such metrics renders ESG ratings not only insufficient but also potentially irrelevant. Critics argue that the focus on easily quantifiable data fails to capture the intricacies and intersections of environmental and social justice, leaving pressing issues unaddressed (Wei, 2025). This void in meaningful evaluation reveals a systemic failure within ESG frameworks, where superficial measurements can yield distorted perceptions of corporate success and lead to misguided investment decisions (Fang, 2023).

To counteract this trend, ESG assessments must evolve to encompass comprehensive, multi-dimensional indicators that address actual impacts on society and the environment. This evolution should strive for a broader understanding of resilience and justice within corporate practices, ensuring companies are evaluated not solely on what they report but on their substantive commitments to do good (Shaddady & Alnori, 2024).

3.4 The Risks of Standing Still

The dangers of stagnation in the ESG space cannot be overstated; remaining complacent in an ever-evolving landscape invites significant risks. Companies that fail to adapt to shifting societal expectations and regulatory requirements face a multitude of consequences, including legal penalties, exclusion from capital markets, and backlash from increasingly discerning consumers (Ehlers et al., 2023). The reality is that ESG is no longer simply a matter of compliance but one of survival in a market environment that values genuine ethical behavior and proactive sustainability measures.

As regulatory frameworks tighten and investors grow more sophisticated, the future of ESG will belong to those organizations that transition from mere symbolic compliance to substantive action. High-performing companies can no longer afford to rest on their laurels; instead, they must actively seek ways to integrate ESG considerations into their core strategies, operations, and cultures (Keeley et al., 2022). Those that continue to prioritize optics over action risk not only their reputations but also the stability of their business models in a market that scrutinizes ethical commitments increasingly (Wedajo et al., 2023).

In conclusion, the paradox of ESG success lies in the disheartening reality that high ratings can mask deep ethical failings. To realign ESG with its foundational goals, significant reforms are necessary in measurement and accountability frameworks. Until substantive action is intertwined with ESG scores, the potential for genuine progress will remain stifled, and the ultimate goal of promoting sustainable and equitable practices will remain elusive.

Chapter 4 – The Missing Stakeholders: Who ESG Leaves Out

4.1 ESG Without the People

The existing framework of Environmental, Social, and Governance (ESG) practices frequently overlooks the voices of those most affected by corporate actions—namely, workers, farmers, and Indigenous peoples. The current ESG model skews heavily toward shareholder risk assessment, often sidelining social rights and the lived experiences of individuals and communities impacted by corporate decisions Aliani et al. (2024). The omission of these critical stakeholders from both the design and evaluation processes of ESG frameworks perpetuates a narrative that prioritizes profits over people and environmental health.

Incorporating the perspectives and lived realities of these communities into ESG frameworks is essential for addressing systemic injustices and ensuring that corporate actions align with ethical standards rather than mere regulatory compliance (Cohen & Zhu, 2024). This requires a fundamental shift in how ESG is understood and implemented—moving it from a distant concept focused mainly on financial returns to a deeply rooted commitment to societal welfare and environmental responsibility (Wang et al., 2023). As various studies highlight, when stakeholders are actively engaged in shaping ESG policies, the outcomes are far more reflective of the actual impacts on society and the environment (Arayssi et al., 2020).

It is crucial for ESG initiatives to center the voices of those parties most affected by corporate practices, thereby creating inclusive systems that reflect diverse interests. Failing to do so undermines the legitimacy of ESG efforts and risks perpetuating harm to vulnerable groups, failing to deliver on the promises of sustainability and social justice encapsulated in the original ESG ethos (Kölbel et al., 2020).

4.2 From Investor Logic to Impact Logic

Currently, ESG practices reflect a predominant "investor logic," focusing on quantifying risks and minimizing liabilities while often sidelining the broader impacts of corporate actions on communities and the environment. This perspective prioritizes financial returns linked to risk assessment, neglecting the tangible social and environmental consequences caused by corporate operations (Escrig‐Olmedo et al., 2019). What is critically needed is a paradigm shift towards "impact logic"—a framework that emphasizes measuring lived outcomes, prioritizing restorative practices, and redefining success through the lens of justice (Reber et al., 2021).

By adopting impact logic, ESG ratings can evolve beyond mere reflections of compliance and financial risk. They can begin to address the genuine ramifications of corporate actions on societal welfare and ecological health. Studies assert that when organizations embrace this orientation, they become better positioned not only to fulfill ethical obligations but also to enhance their competitive advantage in a marketplace increasingly demanding corporate social responsibility (Bruno & Henisz, 2024; Chimbi & Jita, 2021).

Reimagining ESG through the lens of impact can help ensure that it serves the public good rather than solely private interests. This requires stakeholders—especially investors and corporate leaders—to rethink their definitions of value and success to include active contributions toward social equity, environmental stewardship, and community resilience (Buniamin & Ahmad, 2018).

4.3 The ESG Data Divide: Whose Metrics Matter?

The predominant lack of representation in ESG narratives typically sidelines communities impacted by extractive practices, as most data within ESG frameworks is company-controlled, rarely verified, and often unaudited (Wang et al., 2022). This data divide exacerbates the disconnect between what corporations report and the experiences of those directly affected by their practices. When data is largely produced and controlled by companies for self-affirmative narratives, it fails to provide a full, comprehensive account of the actual impacts on local communities and the environment (Wang et al., 2023).

For ESG frameworks to receive credibility, it is imperative to incorporate participatory metrics shaped by the communities directly impacted by business practices (Tan et al., 2024). This would involve integrating local data, validating information through third-party assessments, and ensuring that the communities involved have a say in how their experiences influence corporate ESG strategies (Chevrollier et al., 2020; Ge, 2024). Such reforms could radically enhance the authenticity of ESG evaluations, making them more reflective of the realities on the ground rather than corporate self-promotion.

Moreover, democratizing ESG data ensures inclusivity in decision-making processes within organizations. By elevating the voices of marginalized communities in the creation of ESG metrics, companies can align their business practices with broader social and environmental goals—a necessity to mitigate risks and build sustainable futures for both the organization and the populations it affects (Baines & Hager, 2022).

4.4 Why Moving Forward Matters Now

Transitioning to an inclusive ESG framework is not merely an ethical obligation but also a strategic imperative for organizations seeking resilience and sustainable growth. Companies that prioritize stakeholder engagement and center their strategies around inclusive ESG practices often outperform those that remain stagnant, potentially facing increasing legal penalties, consumer backlash, and capital exclusion in the absence of responsive action (Bachtiar & Arief, 2024; Aureli et al., 2020).

As organizations integrate stakeholder voices into their strategies, they stand to attract purpose-driven talent, cultivate higher levels of employee satisfaction, and enhance their overall reputation in the market (Cicchiello et al., 2022; Horobeț et al., 2024). Research consistently demonstrates that companies committed to robust ESG practices experience better financial performance and longer-term viability in the face of challenges resulting from rapidly evolving market conditions (Adams & Abhayawansa, 2022).

Thus, addressing the missing stakeholders within the ESG conversation is not only a matter of social justice but also a vital strategy for amplifying organizational success in an increasingly conscientious marketplace. Companies that deliver on their commitments to engage stakeholders substantively will be well-positioned to navigate the complex demands of future global business challenges (Liu & Xie, 2024).

In conclusion, prioritizing stakeholder inclusion in ESG frameworks is essential to reclaiming the integrity and purpose that ESG initially promised. Enabling communities to have a voice in shaping ESG narratives and metrics ensures that corporate practices align more closely with societal needs and ecological realities, fostering a sustainable future for all parties involved.

Chapter 5 – Reclaiming ESG: Truth, Justice, and Transformation

5.1 What Comes After ‘Responsive’?

The journey of Environmental, Social, and Governance (ESG) practices is continuously evolving, with many organizations transitioning from basic compliance to a more integrated approach. A notable sign of ESG maturity is the emergence of leadership that demands better quality data, promotes cross-departmental collaboration, and integrates ESG considerations into enterprise risk models. This progression reflects a fundamental shift; moving forward means linking ESG to a company's mission rather than merely focusing on profit margins Ramadhan et al. (2023).

Companies that are embracing these signs of maturity illustrate how ESG can be leveraged as a transformative force, driving meaningful change rather than serving as a checklist of compliance measures. By embedding ESG into their core strategies, organizations not only fulfill ethical obligations but also open pathways for innovation, enhanced performance, and improved stakeholder engagement (Atif et al., 2022). The necessity to connect the essence of ESG with corporate missions emphasizes that sustainable growth can align with long-term profitability, ensuring ESG becomes a fundamental aspect of business operations.

As firms recognize the interconnectedness of ESG metrics and broader organizational goals, they establish frameworks that promote holistic assessments of risk and opportunity. This integrated approach not only furthers compliance but fortifies a corporation's commitment to authentic social and environmental stewardship, positioning them favorably in an increasingly conscious market (Mathath et al., 2024). In doing so, businesses can cultivate resilience in the face of challenges, align operational strategies with stakeholder expectations, and execute actions that contribute to a sustainable future for all.

5.2 Redesigning ESG from the Ground Up

A meaningful redesign of ESG frameworks requires bold shifts not merely in metrics but in organizations' underlying philosophies (Ivașcu et al., 2022; Alkatheeri et al., 2023). Achieving transformative ESG practices means aligning them with global standards, actively listening to stakeholders, and embedding ESG accountability across governance and operations. It's essential to recognize that this is not about creating more metrics but about developing meaningful ones that genuinely reflect the impact of corporate activities (Jhunior et al., 2025).

Organizations must establish transparent and reliable criteria for measuring ESG performance while being anchored in community engagement and local realities. This necessitates a departure from the top-down, purely quantitative approaches that have often characterized ESG evaluations. Instead, companies must seek to co-create metrics with affected communities, ensuring that their assessments encompass a plethora of lived experiences and cultural contexts (Lichtenthaler, 2023; Sari et al., 2024). This collaborative approach can enhance mutual trust between corporations and stakeholders, fostering an environment in which ESG goals are more effectively pursued.

Additionally, by redesigning ESG frameworks to include a diverse range of perspectives, companies can cultivate a greater awareness of systemic inequalities and environmental challenges they may contribute to, thus fostering a culture of accountability and continuous improvement. In doing so, organizations can enhance strategic foresight, enabling them to anticipate stakeholder concerns and actively engage in addressing societal and environmental issues (Iamandi et al., 2019).

5.3 Reclaiming Community Oversight in ESG

For ESG frameworks to gain credibility and relevancy, there is an urgent need to establish mechanisms for community oversight that become standard practice. Citizen audits, participatory scorecards, and frontline validation must be integrated into the ESG evaluation processes to ensure that corporations are held accountable not only to their shareholders but also to the very communities that are affected by their operations (Habermann, 2021; Solaimani, 2024).

ESG without community feedback is inherently incomplete; effective governance demands a justice-oriented approach where communities affected by corporate actions co-author metrics and assessments that capture their realities. In their absence, corporate narratives risk becoming detached from actual impacts, undermining the purpose of ESG efforts (Ragazou et al., 2022).

Furthermore, engaging communities in the ESG evaluation process allows for the integration of nuanced insights that routine reporting often omits. Research has shown that this collaborative approach can enhance the accuracy and relevance of ESG assessments while reinforcing corporate commitments to social responsibility (Tan et al., 2024). By centering community voices, organizations can foster greater transparency, improve stakeholder trust, and ultimately align their ESG initiatives with broader societal goals.

5.4 Signals You’re Ready to Advance

Organizations that demonstrate readiness to advance their ESG practices exhibit several key characteristics: regular inclusion of ESG discussions in strategic meetings, the emergence of informal ESG initiatives, and a growing acknowledgment among leaders of ESG as a reputational and ethical imperative. Now is indeed the time for action (Saini et al., 2021).

When ESG topics permeate strategic conversations, they signal an organizational commitment to proactively engage with issues that could affect enterprise performance and stakeholder relations. Research indicates that organizations prioritizing ESG are often better positioned to navigate regulatory pressures, consumer demands, and emerging trends in sustainability (Moreira et al., 2023).

Adopting a mindset oriented toward active ESG advancement not only cultivates a culture of responsibility but also unlocks opportunities for innovation and resilience. Forward-thinking organizations are ready to break free from outdated frameworks, embracing a transformative approach that elevates the role of ESG in their strategic endeavors and fosters deeper engagement with all stakeholders integral to their missions (Atif & Ali, 2021; Makhdalena et al., 2023).

In summary, reclaiming and revitalizing ESG requires a commitment to truth, justice, and transformation. By centering stakeholder voices, fostering impactful measures, and integrating community oversight, organizations can develop ESG practices that resonate with their foundational goals and drive sustainable change across society and the environment.

6. Conclusion: From Illusion to Integrity

6.1 The Score Is Not the Story

In evaluating Environmental, Social, and Governance (ESG) practices, it is crucial to acknowledge that a high score does not inherently equate to high standards of ethical and sustainable behavior. Many companies have successfully achieved favorable ESG ratings while concealing harmful practices behind polished reports, leading to the notion that the score is not the definitive narrative Triwacananingrum et al. (2024)Feng et al., 2024). For ESG to be genuinely transformative, it must emphasize consequences over comfort and prioritize truths that reveal the actual impact of corporate actions on society and the environment (Gangi et al., 2024).

This suggests a critical reevaluation of how ESG performance is reported and assessed. Stakeholders must demand transparency and authenticity, ensuring that ratings reflect real-world ethical practices rather than merely allowing corporations to engage in greenwashing (Chen, 2025). Ultimately, the narrative surrounding ESG must shift from a focus on what looks good to what does good, anchoring the evaluation in tangible outcomes that contribute to social and environmental justice rather than superficial metrics or appearances (Юй, 2025).

6.2 ESG Isn’t a Destination. It’s a Discipline

A fundamental truth recognized by sustainable companies is that ESG is not a static endpoint but a continuous discipline that requires ongoing reflection, restructuring, and recommitment to genuine improvement (Ahuja, 2024). To thrive in today's rapidly changing socio-economic landscape, organizations must understand the dynamic nature of ESG practices, embracing it as an iterative process rather than a one-time initiative (Gong, 2024).

Effective integration of ESG into business operations demands a proactive mindset, where companies regularly assess their impact and adapt strategies accordingly. By treating ESG as a discipline informed by stakeholder feedback and community engagement, organizations can foster a culture of accountability and integrity that resonates with broader societal values (Fang, 2023). This understanding positions ESG efforts not only as a compliance requirement but as a core component of corporate governance that drives sustained value creation for all stakeholders (Yurieva & Shevchenko, 2024).

6.3 From Policy to Performance

For ESG frameworks to evolve effectively, the focus must shift from policies existing solely on paper to actual performance in practice. As highlighted in various studies, trust cannot be manufactured— it must be earned through consistent action and accountability (Zatonatska et al., 2024; Bell & Patt, 2022). Companies that anchor their ESG commitments in demonstrable performance metrics, reflected in their day-to-day operations and decision-making processes, establish a robust foundation for stakeholder trust and engagement.

This necessitates a commitment to transparency and a willingness to participate in participatory frameworks where community feedback informs corporate strategies (Chen, 2024). In doing so, organizations can bridge the gap between policy declarations and actual behavior, ensuring that their ESG efforts resonate with stakeholders and authentically contribute to societal good. As the ESG landscape continues to evolve, it is imperative for businesses to integrate these principles dynamically, adapting to emerging trends and heightened expectations from investors and consumers alike (Li & Jung, 2023; Dey, 2025).

Ultimately, reclaiming ESG involves fostering a culture of integrity that values truth and accountability above all. By adhering to these principles, organizations can transform their impact on the environment and society, paving the way for a more sustainable and ethically grounded future.

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Monday, June 9, 2025

The ESG Illusion: Reclaiming Impact Over Optics

The ESG Illusion: Reclaiming Impact Over Optics

Introduction—ESG at a Crossroads

1. The Mechanisms of ESG Ratings and Corporate Behavior

2. ESG Disclosures: Validity and Impact on Firm Value

Chapter 1 – The Illusion of Integrity: When Scores Conceal Harm

1.1 High Scores, Low Ethics – The Optics Trap

Chapter 2 – From Compliance to Convenience: How ESG Lost Its Soul

2.1 The Birth of the Box-Ticking Culture

2.2 The Responsive Stage – Where Many Stop

2.3 Bureaucracy Over Purpose – When ESG Becomes Hollow

Chapter 3 – The Paradox of ESG Success

3.1 When High Scores Hide Low Ethics

3.2 The Black Box of ESG Ratings

3.3 Metrics That Miss the Moment

3.4 The Risks of Standing Still

Chapter 4 – The Missing Stakeholders: Who ESG Leaves Out

4.1 ESG Without the People

4.2 From Investor Logic to Impact Logic

4.3 The ESG Data Divide: Whose Metrics Matter?

4.4 Why Moving Forward Matters Now

Chapter 5 – Reclaiming ESG: Truth, Justice, and Transformation

5.1 What Comes After ‘Responsive’?

5.2 Redesigning ESG from the Ground Up

5.3 Reclaiming Community Oversight in ESG

5.4 Signals You’re Ready to Advance

6. Conclusion: From Illusion to Integrity

6.1 The Score Is Not the Story

6.2 ESG Isn’t a Destination. It’s a Discipline

6.3 From Policy to Performance

References