To what extent is sustainable finance “window dressing”?

ESG investing results on the laptop screen.

Environmental, social, and governance or ESG investing has experienced a massive inflow of funds in recent years. Given the emphasis on ESG in the media and among the finance community one could easily believe that capital markets are a major contributor to the goal of limiting global warming.

Focusing on the environmental dimension of ESG we argue this perception is largely false; a narrative strongly pushed by the finance industry to highlight green initiatives and in so doing, block further (potentially profit-reducing) regulation.

We frame our work relative to the finance literature, mostly drawing from economists, but with a critical sensibility drawn from financial geography more generally. Our contribution is to offer a critique of ESG financing on “its own terms” and show how it is largely failing to deliver the outcomes that the finance literature and economic theory would predict.

Three main arguments back our analysis:

  • First, actual real-world climate-change prevention driven by capital markets are rather minuscule. Slightly higher capital costs do not translate into meaningful price changes, and in any case, demand often has very low elasticity.
  • Second, while some investors are willing to sacrifice returns for climate-change prevention, most intermediaries are not. Instead, the risk of greatest concern to the finance community is not a warming planet, but potentially upcoming climate-change regulation (“transition risk”). Absent clear standards for measuring impact on climate change, many standard financial products are easily “greenwashed”, providing opportunities for higher fees by funding managers and other financial actors but little actual impact.
  • Third, many green investments would have been done anyway, and so green financing is hard to distinguish from conventional funding.


Green finance is more accurately seen as a source of additional fees for the finance industry rather than a means of actual CO2 reduction (or similar good things for the environment). However, few of the people involved seem to care: Investors feel good, ESG rating agencies come into being and flourish, accountants, commercial and investment banks, asset managers etc. prosper, companies get (slightly) cheaper funding and a better image as do stock exchanges. Regulators are busy, politicians can showcase action and change, and last but not least, business schools are able to offer green investment classes, heart-warming case studies and a good conscience. Everybody is happy. Only one thing is decidedly unimpressed: the earth’s temperature which continues to rise.

Given this, we argue that even fully green capital markets will not save the planet and may be counter-productive to the extent they provide arguments and political cover against enacting stricter real-world regulation.


Excerpt of: Grote, Michael H. and Zook, Matthew, The Role of Capital Markets in Saving the Planet and Changing Capitalism – Just Kidding (January 28, 2022). Available at SSRN


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