ESG for all? Rethinking responsible investment

Written By:

Dan Smith
Analyst

ESG frameworks have strengthened accountability but created blind spots. Dan Smith explores how bureaucratic, climate-focused approaches overlook social priorities and emerging market realities in responsible investment

Over the last three years I have worked as an investment analyst in the Local Government Pension Scheme (LGPS) sector, whilst also completing my undergraduate degree in Politics and International Relations at the SOAS, University of London.

This dual perspective highlighted a gap that I felt needed attention: how do environmental, social and governance (ESG) tools translate in the Global South? Are they equitable? And are they fit for purpose beyond the asset owner’s own jurisdiction?

Consequently, this inspired my dissertation: Neocolonialism and ESG: Rethinking Responsible Investment in the LGPS.

ESG has become synonymous with responsible investment, but its frameworks may unintentionally act as barriers to equitable capital flows between developed and emerging markets.

While disclosure frameworks and fiduciary duty have anchored ESG in mainstream finance, their Western-centric design risks excluding emerging markets and prioritising measurable environmental metrics over broader social outcomes.

This article explores these tensions, drawing upon my own research with LGPS funds, asset managers as well as ESG professionals working in emerging markets.

Where it all began

Responsible investment didn’t begin with net-zero targets or lengthy disclosure frameworks. It began with activism.

Faith groups and civil rights movements in the 1960s and 1970s encouraged investors to use capital as a tool for change, most notably during the campaign against South African apartheid. Ethical considerations drove institutional investors to reconsider where and how they allocated funds.

These early approaches would eventually evolve into socially responsible investing and corporate social responsibility as a way of aligning finance with values. Over time, this led to the development of ESG; a shift from values-based exclusion to integration of environmental, social, and governance factors into mainstream financial analysis and risk management.

As ESG has become increasingly financialised and institutionalised at portfolio level through frameworks such as the United Nations Principles for Responsible Investing (PRI), the UK Stewardship Code, the Task Force on Climate-related Financial Disclosures (TCFD), and the Sustainable Finance Disclosure Regulation (SFDR), questions have emerged about how responsible investment is defined, by whom, and ultimately, for whose benefit.

ESG and bureaucracy

One reason ESG has grown so quickly is bureaucracy. Reporting frameworks such as PRI, the Stewardship Code, TCFD and SFDR have institutionalised responsible investment as a core part of mainstream financial decision making.

For investors like the LGPS, these frameworks offer legitimacy, evidence that they are keeping pace with peers and regulators, and reassurance that sustainability is embedded in long-term financial planning.

These frameworks have anchored ESG within their fiduciary duty, the foundation of all investment decisions.

ESG is increasingly understood as integral to protecting long-term value. Responsible investment strategies can direct capital towards sustainable asset classes and products while improving accountability and advancing human rights, decarbonisation, and governance reform.

So, while frameworks have created much needed cohesion, bureaucracy has also stripped ESG of nuance.

As ESG becomes defined through compliance with disclosure requirements, the more it becomes about process rather than purpose. My research revealed that LGPS professionals often view ESG primarily as risk management.

As one interviewee put it, responsible investment isn’t done for philanthropic reasons. After all, the primary objective is to have enough money to pay the pensions. ESG isn’t about driving impact but avoiding risk; thus, ESG is a tool to manage financial materiality, not necessarily to drive tangible social or environmental outcomes.

A deeper question therefore emerges: who sets the standards? The dominant ESG frameworks originate in the Global North, reflecting the institutional capacities, data availability and risk priorities of developed markets. For many institutions in the Global South, meeting these standards is often extremely challenging.

This results in emerging markets facing the “ESG ceiling”, where access to capital is restricted not because companies aren’t transitioning, but because they cannot produce the kinds of glossy disclosures investors now expect.

The unintended consequence is a form of financial gatekeeping that risks reinforcing global imbalances in capital flows. During my research, one LGPS fund noted that emerging markets were deemed too risky because of high carbon emissions and the lack of TCFD reporting, therefore they exited those markets.

This isn’t to suggest that bureaucracy is without value. It has improved accountability and brought ESG and responsible investing into the mainstream, but it has also created blind spots. By encouraging what can be standardised and measured, it risks losing social and local context.

The imbalances

One of the clearest blind spots created by ESG’s bureaucratic, Western-dominated frameworks is the imbalance between environmental and social factors. Climate change dominates responsible investment because it is measurable.

Carbon emissions can be quantified, targets can be set, and progress is benchmarked. This makes the “E” a natural fit for fiduciary duty; Investors can demonstrate how climate risks may affect portfolio value and how these risks are being managed.

The “S”, by contrast, is far more complex. Social issues are broad, politicised and less easily translated into financial metrics. In my research, LGPS professionals consistently noted that climate came with concrete targets, while social considerations did not, and therefore ended up as stewardship engagement activities.

It was much harder for LGPS funds to consider social risks as part of their fiduciary obligation.

That imbalance becomes even more pronounced in emerging markets, where ESG frameworks designed in the Global North may fail to capture local realities. One interviewee with emerging market experience said, “on the ground, S is probably more important at this stage”.

Emerging markets recognise the importance of decarbonisation; they must comply with these climate-oriented frameworks to maintain access to capital. However, these metrics can overshadow pressing local priorities that are just as urgent as climate risks, such as poverty alleviation, jobs, and migration.

Similar challenges exist in developed markets too, for example in debates over housing, inequality and labour rights, but the consequences are far more acute in emerging economies, where exclusion from capital investment can compound historical vulnerabilities rooted in colonialism.

As responsible investment develops globally, the ethical dimensions of decision-making are becoming harder to ignore. Trustees, committees and asset owners now have to confront questions that sit at the intersection of finance and ethics.

Issues such as war, human rights and weapons exposure cut to the heart of the social dimension of responsible investing; however, the ESG tools (scores, screens and disclosure frameworks) designed to guide these approaches are poorly equipped to capture them.

Arguably, because fiduciary duty demands that decisions be justified through financial rationale, it is often easier to focus on what can be measured than on what should be questioned. But if ESG is to remain credible, it must find ways to engage with the “S”, not only as a set of metrics, but as a reflection of real people.

Towards a better balance

A better balance in responsible investment may come from rethinking how fiduciary duty is understood in today’s context. My research found that fiduciary duty is still widely interpreted through the lens of risk management – protecting funding positions, avoiding volatility, and complying with disclosure frameworks.

Fiduciary duty seemingly steers funds towards stable, developed markets and away from more complex, higher emitting and socially nuanced regions.

Ensuring sufficient funds to pay the pensions remains central. However, with a single materiality approach, ESG risks that are difficult to measure, such as social inequality, weak infrastructure or migration, are often sidelined despite their long-term impact on economic resilience.

There are signs of alternative approaches. Many LGPS funds already invest in affordable housing, life sciences, or local infrastructure.

These strategies align with their fiduciary duty while also delivering tangible social outcomes. They demonstrate that double materiality (considering both risks to the fund and impacts on society) is possible without compromising fiduciary obligations.

The next step is to extend this thinking globally, recognising that emerging markets face different development pathways and require investment strategies adjusted to local priorities.

Applying carbon-heavy metrics designed for developed economies risks constraining much-needed capital flows when they are unable to meet them and overlooking local priorities.

If ESG is to remain a tool for investing responsibly, it cannot be confined to the fiduciary duty of scheme members alone; it must also consider wider community and economic stakeholders.

That means developing ESG approaches that are sensitive to local contexts. What counts as sustainable in Europe may look very different in Lagos or India.

It also requires tools capable of capturing the social and governance realities that are context-specific, rather than solely the carbon footprint of a portfolio.

Conclusion

ESG has undoubtedly strengthened accountability and mainstreamed sustainability in finance. But as it becomes more institutionalised, it risks overlooking the diversity and complexity of the global investment landscape.

A more balanced approach requires reinterpreting fiduciary duty to account for long-term societal and environmental resilience alongside financial performance.

For the LGPS and other institutional investors, that means engaging more deeply with local context and adapting responsible investment strategy to reflect different geographic realities. The next phase of ESG must recognise that standard metrics do not capture the full picture.

ESG has the potential to work for all if it is applied with an understanding of local priorities, capacities, and constraints.