By – Aditi Gupta

Abstract:

This paper critically examines the rise of Environmental, Social, and Governance (ESG) frameworks, highlighting their growing global importance and underlying limitations. Initially envisioned to protect investments from non-financial risks and to promote corporate responsibility, ESG has become central to sustainable investing and international trade practices. However, inconsistencies in ESG ratings, coupled with widespread greenwashing and tokenistic compliance practices, have undermined its credibility. Case studies, such as the Volkswagen emissions scandal, expose how companies exploit ESG labels without genuine commitment to ethical standards. While regulatory bodies in India and internationally have strengthened reporting mandates and anti-greenwashing guidelines, significant gaps in transparency, accountability, and enforcement persist. This paper argues that without stronger oversight, independent audits, and a cultural shift from mere box-ticking to authentic ethical conduct, ESG frameworks risk becoming performative rather than transformative. True progress demands aligning regulatory efforts, investor expectations, and corporate practices toward deeper accountability and sustainable development.

The Rise of ESG and Its Limitations

The term ESG (Environmental, Social, and Governance) was coined by a British law firm in its report for the UN Environment Programme Finance Initiative in 2005. The report asserted that incorporating ESG factors aligned with investors’ fiduciary responsibilities in financial analysis. The incorporation of ESG was to protect investments by avoiding financial risks from things such as climate change, worker disputes and human rights issues in supply chains, poor corporate governance, and any resulting litigation. ESG has emerged as a framework for evaluating a company’s sustainability and ethical practices across environmental impact, social responsibility, and corporate governance, becoming a cornerstone of sustainable investing. Sustainable investing is crucial for societal impact, often aligning with personal values or managing risks while making money. Currently, the evolving political climate emphasises the importance of adopting these responsible practices by private corporations, investors, stakeholders, and consumers who are often acquainted with these aspects, having shifted focus away from merely the product. As this trend continues, the company’s long-term growth, success, and reputation are tied to its ESG performance, moving beyond just compliance. 

Although prominent, ESG ratings have become so broad as to lose much of their meaning and are inconsistent in performance ratings. Greenwashing often involves labelling unsustainable products as eco-friendly to create a false perception of responsibility, and it is very commonplace. The Environmental, Social, and Governance guidelines are gaining prominence globally because of their prospects in safer investments with their potential for significant impact; however, the on-ground realities have proven to be separate from the aspirations jotted down on paper, as they succumb to greenwashing and short-termism. 

ESG’s Global Impact on Trade and Investment

ESG principles are reshaping global investment trends and trade policies. The World Economic Forum (WEF) and International Business Council (IBC) urged more multinational corporations to adopt ESG standards in 2020. Investors are also increasingly motivated by adherence to the Sustainable Development Goals (SDGs) and UN Principles for Responsible Investment (PRI). The European Union’s Carbon Border Adjustment Mechanism (EU CBAM), more commonly termed as the carbon tax, will impose a 20-35 per cent tariff equivalent on energy-intensive goods exported from India to the EU. CBAM targets 6 items, including aluminium, iron, steel, and cement. In anticipation of the implementation from early 2026, Indian steel and metal exporters are pivoting towards renewable energy to reduce their carbon footprint and avoid hefty penalties in trade. As per a 2024 survey report by Uniqus Consultech and IMA India, among large Indian companies, the adoption and voluntary disclosure of targets (75 per cent) and sustainability goals (84 per cent) has been notable. Meanwhile, small and medium-sized enterprises (SMEs) have not committed to the same extent as of yet, with only 29 per cent participation, highlighting a growing divide in ESG readiness.

ESG Ratings in India: Regulation and Reality

Recognising ESG’s growing significance, the Securities and Exchange Board of India (SEBI) mandated that the top 1000 companies by market capitalisation must undertake ESG reporting and disclosures, wherein they must submit a Business Responsibility and Sustainability Report (BRSR) as part of their annual filings from Financial Year 2023. India has been a frontrunner in incorporating Corporate Social Responsibility (CSR) since the enactment of the Companies Act, 2013. Section 135 of the Act stipulates that every company meeting certain financial thresholds shall undertake a CSR Policy and, every financial year, allocate a minimum of 2 per cent of their average net profits made during the three immediately preceding financial years towards CSR initiatives. Total CSR expenditure has reached ₹25,932 crore in 2021-22 from ₹8803 crore in 2014-15. However, Deloitte’s ESG preparedness survey 2023 revealed that only 27 per cent of Indian companies are equipped to meet their compliance requirements.

The Government of India introduced Guidelines for Prevention and Regulation of Greenwashing, 2024, targeting misleading terms and images on a product or its component that exaggerate or conceal relevant information while making unsubstantiated environmental claims. Emphasis has also been laid upon clear and accessible disclosures supported by credible third-party certification or reliable scientific evidence. Moreover, the Indian government has undertaken initiatives to promote green bonds for sustainable projects. 

Internationally, stock exchanges and financial regulatory bodies have embedded ESG standards into corporate reporting to drive transparency and risk management through their inclusion in financial reports to promote responsible corporate behaviour. Yet, despite these efforts, misrepresentations, superficial disclosures, and an over-reliance on self-certification still mar the credibility of ESG evaluations.

Volkswagen and the Myth of ESG Compliance

Due to the dependence of a company’s popularity and success on ESG ratings, many cases have emerged where sustainable labels were slapped onto unethical products that did not meet the standards for the rating. The infamous Volkswagen Emissions Scandal, termed Dieselgate or Emissionsgate, from 2015 occurred when the group advertised its diesel cars as “clean” due to low emissions performance, zooming past its other competitors, such as Toyota, to place itself as the world’s most sustainable automaker. Many invested and bought these cars under the influence of high ESG standards. However, a few months later, it came to light that the German automobile manufacturer had cheated on emissions tests, and its poor corporate governance was at the root of the problem. 

The “defeat device”- or software- in the diesel engines was capable of detecting when the vehicle was being tested. It accordingly enhanced the performance and improved results. The engines had been emitting nitrogen oxide pollutants up to 40 times above the permissible limit in the United States. Furthermore, there was a direct impact on Volkswagen’s shares as they fell by about a third in late 2015. With misguided incentives and a checking-the-boxes mentality that is largely performative, the carmaker’s irresponsible pursuit to be the biggest was its shortcoming, as it undermined the very spirit of sustainable and ethical practices. It also proves that ESG investment has been too simple a score or rank to reduce financial and sustainable performance to. 

By the measure of the six capitals of integrated reporting-financial, manufactured, intellectual, human, natural, and social, and relationship-that have gained favour in recent years, Volkswagen also suffered dearly. It has also been found that Volkswagen’s sustainability reports were prepared by one firm from 2008-2013, claiming that their report must not be relied upon by stakeholders, “The report is not intended for any third parties to base any [financial] decision thereon. We do not assume any responsibility towards third parties.” When such auditors try to evade the responsibility of their reports, only through greater scrutiny and comprehensive inspections can sustainability report assurances be provided. The society would be better served by the purpose of sustainable reports only if there is a higher level of assurance and transparency that fully informs stakeholder decisions. 

The Need for Stronger Oversight and Cultural Change

Updated ESG regulations are often designed not to burden stakeholders but to ensure realistic adoption rates, available technology, public benefit, and time for compliance. They have remained a necessary, reasonable, and achievable step towards sustainable technologies, but when they are met with disregard and fraudulent methods, the need for stringent regulatory interventions, penalties, and public scrutiny only increases. These are initiatives designed to protect the people and the earth; however, such aggressive refusal of regulations by participating in deceptive practices for profiteering will only be further punished and looked down upon by the international community, investors, and stakeholders, although only after they come to light. The Volkswagen case serves as a cautionary tale: sustainable regulation must not just exist; it must be enforced, audited, and integrated into a culture of genuine corporate accountability.

Conclusion: ESG’s Future — From Checklists to Genuine Change

ESG guidelines have undeniably advanced the spirit of sustainability and successfully provided momentum to corporate responsibility in climate change and global warming, catalysing action on issues like plastic reduction, worker rights, and climate risks. Yet, they are far from a foolproof long-term solution capable of addressing complex problems thus far, with the increased need for government intervention and penalties for greenhouse gas emissions. Superficial compliance, greenwashing, and corporate scandals show that ESG today remains more a tool for marketing and risk management than a true transformation mechanism.
For ESG to fulfil its transformative potential, governments, regulators, investors, and consumers must move beyond reliance on voluntary disclosures and opaque ratings. True progress will demand greater transparency, independent audits, stakeholder participation, indigenous rights protection, and, above all, a culture shift from box-ticking compliance to genuine ethical commitment.  Only then can ESG evolve from a performative exercise to a foundational pillar of sustainable and equitable development.

Author’s bio: Aditi Gupta is a graduate of B.A. (Hons.) Liberal Arts and Humanities with a major in Political Science and International Relations. She is interested in pursuing further studies in international relations, environmental studies, and economics.

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