ESG is Dead. Long Live ESG - Back to business

So, is ESG over?

Yes and no. The ESG many of us knew—focused only on disclosures, declarations, and principles—is over. It was a necessary path but insufficient. We need another ESG, one that is not just another name or acronym.

"ESG is dead, long live ESG"?is not a title I invented. It comes from an article by Lindsay Hooper, CEO of the Institute for Sustainability Leadership at the University of Cambridge, published in the?Financial Times?in September last year. The article reflects on?"where it went wrong"?and argues that it's time for a deep revision of the sustainability approach—what she calls?"competitive sustainability."

Instead of?"embedding sustainability thinking into business,"?we should?"embed business thinking into sustainability" finally overcoming the tension between profitability and sustainability. This is a long-promised but not yet delivered goal of sustainability. Other terms, like?"rational sustainability,"?coined by Professor Alex Edmans of the London Business School, follow the same direction.

Regardless of the name, both agree that if ESG has so far been an external factor running parallel to business, it is time for it to be embedded within business decisions—as an internal vector of competitiveness. If we need to find a new name for it, so be it.

The market repeats itself

But what about the market? It doesn’t want ESG anymore, right?

I don't know if it's a benefit of getting older, but it has become increasingly easy to read and anticipate the market behavior. This applies to ESG as well.

First, we know that markets move in cycles. Looking at both the peak of the ESG wave until 2023 and the backlash it is now facing, it's clear that both are exaggerated movements. Neither the?"everything is ESG"?wave lasted, nor will the?"nothing is ESG"?wave persist.

Second, we know that the market is competent at analyzing short-term risks but quite flawed when it comes to assessing systemic and long-term risks.

In 1996, Alan Greenspan coined the term?"irrational exuberance,"?referring to the excessive stock market and real estate assets appreciation. It's said that the market, in jest, spread stickers throughout Silicon Valley reading:?"I want to be irrationally exuberant again."?A decade after the warnings, the exuberant bubble burst in investors’ hands. Understanding that the market wouldn’t regulate itself, stringent rules like Volcker, Dodd-Frank, and Basel III emerged—however, too late.

Environmental risks, which are also systemic and long-term, are no different. Government policies in some regions remain timid, warnings appear here and there, the market turns its back, and risks continue to grow.

It has been 18 years since the?Stern Report?linked climate change to economic impacts (updated in 2023), and five years since a bipartisan letter from renowned American economists was published in?The Wall Street Journal, calling for government action on climate change. Since then, consensus seems to have dissipated.

I write this article in the week when Donald Trump takes office, a significant detour in the sustainability journey that reminds me of the mocking denials from those Silicon Valley stickers. Paraphrasing Greenspan, we are witnessing an?"exuberant irresponsibility"?regarding the planet's resilience. I wouldn’t be surprised if stickers appeared saying:?"I want to be exuberantly irresponsible again."

But ultimately, I am not overly impressed by the headwinds. They will change again. And they will settle into a more serene and pragmatic place.

Economic logic prevails

Notice that I called Trump's inauguration a?detour.?Whether politicians like it or not, climate risks will not disappear and must be addressed. Economic logic always prevails—mistakes eventually come at a price and drive action.

However, economic logic works both ways.

If the?"anti-ESG"?group ignores long-term risks, the?"pro-ESG"?group sometimes forgets short-term economic logic. It is naive to imagine that capital and shareholders will accept operating in an economy based solely on?"principles,“disconnected from economic incentives.

The final part of this article is about that: how market logic can work in favor of sustainability.

"Competitive Sustainability"?or?" ESG of prices"

If the first phase was what I call?"disclosure and principle-based ESG,"?the next phase—what Hooper calls?competitive sustainability—I would call?" ESG of prices."

For progress to occur, markets need a shock in pricing risks, opportunities, and capital—including natural capital.

However, the biggest challenge in pricing is the gap between the long and short term, as climate and biodiversity are intergenerational public goods that are delivered in the long term but must be secured through short-term actions.

There are at least two ways to bridge this gap:

1. Accelerating the pricing of costs and risks.?The most competent agent to induce this acceleration is the government. This can be done through capital allocation requirements for banks, subsidies, penalties (e.g., carbon taxes), and clear and costly anti-greenwashing regulations.

In Europe, as ESG is still a dominant force—around 60% (€6 trillion) of all investments are sustainability-related (SFDR Articles 8 and 9, according to?Morningstar?data from Q3 last year), regulations have already shifted. While new regulations may be delayed (CS3D), significant rollbacks are unlikely.

Brazilian Companies exporting to Europe are already facing tangible costs such as carbon taxes and anti-deforestation laws (see my article?"The Risks of the Green Protectionism"). For these companies, ESG is not a future risk—it is a present one. If it hasn’t been priced in yet, it should be, especially with the EU-Mercosur agreement on the horizon.

Other governments, including those in the UK, Brazil, and some Asian countries, are taking solid steps in the same direction and will likely fill the vacuum left by the U.S.

The market also has a role to play. For example, debt and equity instruments are evolving beyond blended finance.?Sustainability-linked bonds?have been rewarding lower sustainability risks with an average spread of 25 basis points (and up to 150 bps in some cases).

2. Intensifying the pricing of opportunities and natural assets.

This is a point that many in the first generation of ESG professionals nearly lost sight of. ESG is not just about risks and costs (see point 1 above), nor is it only about responsibility (the previous phase of ESG).

It is about opportunity, revenue generation, and value creation. Boards and?chief strategy officers?should challenge themselves to find their competitive edge and more disruptive innovations. If necessary, they should deeply question traditional business models.

Auditors and accountants must advance valuation techniques for natural capital. CFOs should seek markets where sustainable funding is abundant (e.g., Europe). This requires knowledge of ESG—but also of business, international capital markets, and geopolitical trends. It requires long-term planning, persuasion, and short-term investments, whether for countries or companies.

Conclusion

Another quality of maturity is?serenity.?As I mentioned, I see this as the most promising moment for companies to reinvent themselves and find viable, sustainable alternatives. They should double down on their bets, discover their niche in the new economy, and move forward without the previous market anxiety.

However, for governments, my message is less serene. The Brazilian government must act faster than ever to secure its place in the supply chain of the new sustainable economy. This means implementing necessary pricing interventions and policies?in time?to induce the right responses from private sector players.

I have seen firsthand how European regulations?created?the market almost from scratch, driving behavioral change, investment strategy shifts, and increased awareness in a short period. Nothing replaces well-executed and designed economic policy. Governments—including Brazil’s—must act with?a sense of urgency, as if they were already in a post-crisis scenario. As if it were a?"preventative Dodd-Frank for ESG."

Because, unlike financial asset crises, which are reversible, planetary limits are not.