By Candice Boclé, Director of Responsible Investment at Mandarine Gestion

Buoyed by a wave of scepticism from across the Atlantic, ESG is going through a crisis of confidence that is reshuffling the cards in sustainable investment. This backlash could nonetheless encourage companies to go beyond compliance and turn ESG into a genuine lever for strategic transformation.

The roots of the ESG backlash

Between "green fatigue" and the return of reality, ESG has been facing its own paradox for several years now. The more unavoidable it becomes, the more skepticism it arouses. Since its inception, ESG has claimed to offer a universal framework for assessing sustainability. But in reality, the criteria vary from country to country, sector to sector and even player to player. As a result, two companies can obtain high ESG scores while having very different practices, fuelling confusion and mistrust. 

Many companies publish detailed ESG reports without actually transforming their business model. This gap between communication and action fuels accusations of greenwashing and weakens the credibility of the concept. Simplistic rhetoric and insufficient evidence have eroded confidence in certain ESG approaches, while the Manichean vision of Net Zero, diversity and fund labelling has created new reputational risks.

Furthermore, faced with the eternal debate of whether or not ESG funds outperform, many investors struggle to measure the materiality of the criteria used. There are studies showing that some sustainability issues do generate returns over the long term, but this doesn't necessarily mean that everything ESG will improve returns. If ESG is beneficial in the long term, why is its adoption perceived as a costly regulatory constraint?

When Europe regulates: ESG trapped by its own regulatory arsenal

There's little doubt that the EU, whose economy is stagnating, needs to cut red tape. The regulatory jungle with some 14,000 legal acts adopted between 2019 and 2024 hasn't helped. The cost of complying with the Extra-Financial Reporting Directive (EFRD) ranges from €150,000 for unlisted companies to €1.5 million for listed companies. The Commission has proposed postponing the deadlines and exempting around 90% of companies initially subject to the CSRD. Confusion reigns, damaging Europe's business climate. Indeed, large companies point out that it is difficult to provide ESG data on their supply chains if their suppliers don't play ball. Smaller companies are unsure whether to continue their data collection efforts or give up. Many fear that the Commission is rushing to appease - and emulate - the United States, in the midst of its pro-business turn. 

Putting things into perspective: real or relative impact on flows?

The tense geopolitical environment, particularly with Donald Trump's return to the White House, has certainly weakened climate priorities and introduced legal risks for ESG strategies. These concerns have been most acute in the United States, but are also gaining ground in Europe. In terms of concrete consequences on flows, the net outflow recorded in the first quarter of 2025 (-$8.6 billion) for ESG funds (according to Morningstar data) should be put into perspective.

Indeed, the new European regulations on ESG fund naming have clearly played a role. Since November 2024 for new funds (and May 2025 for existing funds), ESMA has imposed strict criteria for the use of terms such as "ESG", "sustainable" or "impact" in fund names. For example, a fund can only use the word "sustainable" if it invests at least 50 % in assets considered sustainable. In addition, funds must exclude certain controversial sectors (arms, fossil fuels, etc.) in order to claim ESG status. Some investors interpreted these adjustments as an admission of past greenwashing. This climate of caution has led to a decline in ESG funds, which are now fewer in number on the market. Lastly, this outflow represents only 0.2% of total ESG fund outstandings, which puts things into perspective. 

AI at the service of ESG: a strategic response to the current backlash?

Provided it is used to reinforce the rigor and traceability of companies' commitments, Artificial Intelligence can represent a powerful lever for a sector in the throes of change. 

AI does indeed have the advantage of speeding up sustainability analysis by rapidly processing large data sets. However, it cannot replace human judgment, particularly when it comes to qualitative factors such as corporate culture, management intent or the credibility of carbon-neutral strategies. Successful investors will know how to combine AI with robust expertise in ESG integration: going beyond slogans in favor of nuance, transparency and rigorous data on material issues. In this context, AI appears to be an invaluable tool.

In short, ESG is caught between its ambition for systemic transformation and the limits of its practical application. It is this tug-of-war that is fuelling the current backlash. If Europe and its fund managers don't give up on their climate ambitions, the U.S. retreat on sustainable investment offers a window of opportunity for European managers, who are beginning to capture a growing share of redeployed capital.