When the whole is less than the sum of its parts: rethinking ESG
For years, ESG - environmental, social and governance - has been treated as a single, unified framework. It has shaped how investors think about risk, responsibility and long-term value. But increasingly, grouping these three distinct concepts together may be doing more harm than good.
This is not an argument against ESG. Quite the opposite. Environmental, social and governance factors all remain important - arguably essential - from a risk and analysis perspective. The case is simply that combining them into a single label risks conflating fundamentally different ideas, leading to confusion, misalignment and, in some cases, unintended consequences.
If ESG is to remain useful, it may be time to break it up.
The problem with treating ESG as one thing
At its core, ESG was intended as a risk framework - a way to identify non-financial factors that could materially affect investment outcomes. But increasingly, it also touches on behaviours, decision-making, and the outcomes firms deliver in practice.
Over time, ESG has evolved into something broader and less precise. It is now often interpreted not just as a tool for risk analysis, but as a reflection of values, preferences, or even political positioning.
This shift creates a problem. When ESG is seen as a single concept, investors who disagree with one element may reject the entire framework. In doing so, we risk throwing the baby out with the bathwater.
Not all parts of ESG are the same. They operate differently, are measured differently, and matter in different ways to different investors. Treating them as interchangeable weakens their usefulness.
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In practice, many investors already treat these elements differently across the investment process. Governance is considered throughout - at entry, during decision-making, and continuously once an investment is held - because it underpins trust, oversight and risk management. Environmental and Social factors, by contrast, are often assessed with different weightings at different stages, sometimes as risk inputs, and sometimes as outcomes or preferences that evolve over time. Bringing them together under a single label can cut across how investment decisions are actually made.
Breaking ESG into its components allows for clearer thinking - and better investment decisions.
E: environmental - important, but often thematic
Environmental factors have become the most visible part of ESG. Climate change, carbon emissions and sustainability dominate headlines and investor discussions alike.
In many ways, “E” has evolved beyond a pure risk lens to also represent a theme. Investors may actively seek exposure to environmental opportunities - renewable energy, clean technology, transition strategies - or avoid certain sectors altogether.
This introduces a natural tension: is environmental investing about managing risk, or expressing a preference?
For some investors, environmental factors are clearly material risks - physical climate exposure, regulatory change, or stranded assets. For others, they are also about aligning portfolios with broader sustainability goals, which may or may not involve trade-offs.
There is no single correct answer. But this is precisely why “E” needs to be considered on its own terms. It can be both a risk input and an outcome, and in some cases a matter of investor choice. Combining it with other ESG elements can obscure that distinction.
S: social - underdeveloped but critical
The “S” in ESG - Social - is arguably the least defined and least consistently measured component.
It spans a wide range of issues: labour practices, customer outcomes, community impact, diversity, and human rights. These are undeniably important, but they are harder to quantify and often lack robust, comparable data.
Like environmental factors, social considerations can reflect both risk and preference. Poor treatment of customers or employees can create clear financial and reputational risks. At the same time, views on what constitutes “good” social outcomes can differ across investors and societies.
As a result, “S” often feels underdeveloped - important, but less embedded in investment processes than it should be.
Separating “S” from the broader ESG label would allow for more focused development: better data, clearer definitions, and more transparent discussions about where it reflects measurable risk versus where it reflects values.
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G: governance - the non-negotiable foundation
Governance sits at the core of investing.
It is a foundational requirement for all investors. Good governance - effective boards, aligned incentives, transparency, accountability, and critically, corporate culture - underpins the integrity of any organisation.
Regulators are increasingly clear that governance is not just about structures, but about behaviours and outcomes in practice. There is a growing focus on how firms act, how decisions are made, and whether those decisions deliver good outcomes for clients and markets.
At its heart, the investment industry is a relationship of trust. Investors entrust capital to firms and rely on them to act as responsible stewards in their best interests. But that trust can be undermined where governance, risk management or controls are weak, allowing conduct or market integrity risks to arise.
Corporate culture is central to this. Culture shapes behaviours - how firms manage conflicts, how they treat customers, and how they balance commercial pressures with long-term outcomes. It determines what happens when rules are not explicit, and how consistently firms act under stress.
When things go wrong, governance is often where attention turns. Not because it is always the sole cause, but because weaknesses in oversight, incentives or culture are frequently what allow risks to build or go unmanaged.
Regulatory frameworks such as the Consumer Duty reinforce this focus on outcomes. Firms are expected not just to comply with rules, but to embed cultures that consistently deliver good outcomes, supported by clear accountability and oversight.
Without strong governance, there is no reliable basis for investment analysis. Financial information becomes less trustworthy, risks are harder to assess, and alignment between firms and investors can break down.
This is why governance should be seen as a starting point - and a constant. It matters at every stage of the investment process and to all investors, regardless of style or strategy.
Making ESG work by taking it apart
Breaking up ESG does not mean abandoning it. It means refining it.
By treating Environmental, Social and Governance factors separately, investors can be clearer about what each represents:
Governance as a universal foundation for risk, behaviour and analysis
Environmental as both a risk factor and, in some cases, a thematic or preference-driven choice
Social as an evolving area requiring better data, clearer frameworks, and careful distinction between risk and values
This separation allows investors to engage with each dimension on its own terms, rather than forcing them into a single, sometimes incoherent framework.
It also reduces the risk of polarisation. Investors who are sceptical about certain environmental or social approaches may still fully embrace governance as essential. Unbundling ESG enables more constructive, less binary conversations.
ESG has played an important role in broadening how investors think about risk and responsibility. But as a single, bundled concept, it has become less precise - and, at times, less useful.
The answer is not to abandon ESG, but to unbundle it.
Environmental, social and governance factors all matter - but they do different things. Recognising that distinction allows investors to be clearer about what they are assessing, what risks they are managing, and where preferences may come into play.
Most importantly, it ensures that governance - along with the behaviours and culture that underpin it - remains front and centre.
In the end, breaking up ESG is not about weakening the framework. It is about making it more credible, more practical, and more aligned with how investment decisions are actually made.