Can ESG Save Life on Earth?

Hello everyone, welcome to this masterclass of knowledge at HEC. I am an Associate Professor of Accounting and Management at HEC Paris. I started to be interested in planetary topics in 2010, thanks to a PhD student who was working on carbon accounting.

The younger generation has been pushing me—students in the classroom and children at home. Today’s topic is whether ESG can contribute to making this planet more habitable. ESG stands for Environmental, Social, and Governance. It is a tool used to quantify sustainability, currently mostly for investors, and is often criticized for greenwashing.

In this masterclass, I will argue that despite its challenges, ESG can help make companies more accountable to all stakeholders and society, not just investors. Currently, ESG is primarily a reporting tool for sustainability performance. However, it can also be an effective accountability framework within companies.

Allegations of greenwashing are largely due to difficulties in quantifying ESG. There is no convergence on which metrics to use or how to measure them, and ESG measurement is socially constructed. Despite these challenges, ESG metrics can be powerful drivers of change.

There is a paradox: business students often view business as inherently evil, and ESG, a finance-centered view of sustainability, is not exempt from criticism. However, business and ESG must be part of the solution. Alongside regulation and individual commitment, ESG provides a framework to monitor the business transition required for sustainability.

ESG translates sustainability or CSR for finance professionals. The term was coined in 2005 by the United Nations Environment Program. Initially, there was debate about the order of the letters—G, E, or S—but the acronym enabled the scaling of the sustainable investment industry. Investors adopted ESG first, while companies adopted it more slowly. For example, L’Oreal started a CSR department in 2012 but only created a Sustainable Finance department in 2020.

When asked why ESG metrics are useful, responses were:

25%: to answer investors’ needs

17%: to anticipate regulations

58%: to manage sustainability

ESG metrics should first be used for managing sustainability. Companies need them to set targets, track progress, and improve performance. Investors are also a major stakeholder because they want to ensure long-term financial value of assets. For example, investors in oil and gas or automotive industries want to understand how market changes will affect these companies in 15–20 years.

ESG faces allegations of greenwashing due to:

Measurement difficulties: ESG quantification is not mature or unified. There is no unified definition of environmental, social, or governance, nor their associated KPIs. Environmental metrics may include GHG emissions, water use, pollution, biodiversity, land usage, or toxicity. Social metrics differ by region: in North America, they focus on equal rights and discrimination; in Europe, on wages, work conditions, and poverty.

Methodological differences: Companies report emissions differently—Scope 1 (direct), Scope 2 (energy purchases), Scope 3 (value chain emissions), or even downstream emissions from products and services.

Social construction: ESG metrics reflect social and political preferences of those setting the measures. Investors are mostly interested in financial materiality—how ESG affects company financial performance—not impact materiality—how companies affect the planet and people.

This explains why ESG is sometimes criticized. There is a need for compromise among all stakeholders—investors, consumers, employees, and society—but building such compromise takes time.

When asked whether ESG metrics should be abandoned due to greenwashing allegations:

13%: yes, ESG is imperfect

62%: yes, ESG has lost credibility

25%: no, ESG metrics are important to set targets and manage sustainability

Despite imperfections and credibility issues, ESG metrics are crucial. They help companies set targets, manage sustainability performance, and drive change. Even companies accused of window dressing often take meaningful steps toward decarbonization and improved accounting.

Decarbonization strategies are a first step; the next step is shifting business models toward circular economy or regenerative practices. ESG metrics are essential for measuring these transitions.

Q&A Highlights:

Do companies like L’Oreal really respect new environmental laws after scandals?
Trust, once lost, takes time and effort to rebuild. Scandals highlight issues and provide opportunities for improvement, but rebuilding trust is long-term work.

Are EU regulations enough to reduce global greenhouse gas emissions?
Europe alone cannot solve the problem; global cooperation is needed. Europe can lead by example, but compromise and collaboration are essential.

What are the initiatives to standardize ESG measures?
There are two main models:

European model: Public, mandatory, legally enforced, based on double materiality (financial and impact).

International Sustainability Standards Board (ISSB): Private, voluntary, focused on financial materiality, aligned with investors.

Convergence is ongoing, and both models differ in scope, rigor, and principles.

How can startups integrate ESG metrics without making it just about fundraising?
For small companies, ESG metrics can be burdensome. The key is correlating emissions with actual physical flows, not just revenue, to identify actionable levers. For instance, using recycled steel, low-carbon concrete, or low-temperature asphalt.

Time is a constraint—what alternatives exist?
Compromise building takes time. Science-based target initiatives exist for carbon and will expand to biodiversity. The process cannot be rushed, or investors dominate ESG decisions.

Do you stigmatize the younger generation?
Denouncing issues can be constructive if it triggers improvement. Radicality is good as long as it drives progress, but action must continue alongside critique.

Action is required for ESG to be effective. Metrics help set targets, track progress, and manage sustainability performance. Achieving impact requires major business transitions—decarbonization, circular economy, and regenerative models. ESG metrics are essential for guiding these changes.

Thank you for your questions and participation in this masterclass.