ESG is now a financial imperative. Here's why

Environmental, social and governance (ESG) has been subject to polarizing agendas, which are financially flawed, politically driven, and ideologically rooted. The pro-ESG view frames it as a moral and ethical imperative, while the anti-ESG view dismisses it as a tool used to pressure companies into prioritizing social and environmental issues over profitability.

Indeed, for over 50 years ESG practices have existed in a landscape marked by subjectivity, poor data quality, constantly shifting legislation, and the absence of standardized frameworks. As a result, ESG remained largely off-limits to finance professionals, perceived more as an advocacy-driven movement than a structured financial discipline.

Fund managers have largely viewed ESG as a regulatory checkbox rather than a strategic tool for value creation. For many companies, sustainability was an afterthought – addressed mainly to meet disclosure requirements and mitigate reputational risk. Merger and acquisition (M&A) professionals largely steered clear of ESG, viewing it as an abstract concept with unclear financial implications rather than a tangible driver of value. ESG was treated as an aesthetic pursuit – an exercise in morality, reputation, and aspirational storytelling. Thankfully those days have finally come to an end.

While the development of global accounting standards took more than a century – hindered by slow progress, regional differences, and complex negotiations among regulators, governments, and businesses – a global sustainability reporting standard has emerged in just three decades. Beginning this year, companies in over 60 countries, from Australia to Zambia, will gradually produce their first sustainability reports under the unified IFRS S1 and S2 standards. The era of inconsistencies is coming to an end. Even Elon Musk’s Tesla will now adhere to the same reporting framework as its competitors, ensuring that all companies speak the same language when telling their sustainability stories.

Ignoring ESG risks is increasingly seen as a credit misjudgment. Rating agencies, which trace their origins back to John Moody’s 1909 ratings of US railroads and once focused solely on financial fundamentals, have expanded their methodologies to recognize the direct impact of ESG factors – such as corporate corruption or rising sea levels caused by climate change – on credit default risk. When The Trump Organization received a Moody’s rating, it too was assessed under an ESG-inclusive framework – clear evidence that even businesses historically resistant to sustainability narratives are now evaluated through this evolving financial lens.

Helsinki-based Upright has just launched a groundbreaking platform designed to quantify the impact of ESG risks and opportunities – such as climate change, pollution, and business conduct – on key financial metrics including revenue, operating profit, profit before tax, company assets, liabilities, equity, and cash flow movements. The data company draws from 300 million scientific articles and covers 50,000 corporations, including those owned or invested by US Commerce Secretary Howard Lutnick, Education Secretary Linda McMahon, and Treasury Secretary Scott Bessent. ESG risks and opportunities aren’t just qualitative concerns – they’re accounted for down to the dollar, literally.

Ignoring ESG factors in M&A decisions is increasingly seen as financially irresponsible. Actually, a recent KPMG survey showed that four out of five dealmakers globally indicate that ESG considerations are on their M&A agenda with 45% of them encountering a significant deal implication as a result of a material ESG due diligence finding (with more than half of these experiencing a “deal stopper”).

Similar logic applies to pricing companies. Valuation methodologies have long evolved, gradually integrating once-peripheral factors – such as consumer sentiment analysis, regulatory compliance costs, public health trends, and geopolitical and supply chain risks – into financial models. ESG is following the same trajectory and will soon be recognized as a fundamental component of risk assessment and cash flow forecasting, making its inclusion in valuation standard practice.

Overlooking ESG will soon be indistinguishable from financial mismanagement – across Europe, the US, and beyond. Ironically, just as ESG reaches its long-awaited stage of readiness for widespread adoption, a political backlash led by the Trump administration is attempting to undermine it, highlighting the very tension between financial soundness and ideological resistance.