Introduction

Environmental, Social, and Governance (ESG) investing has become a cornerstone of sustainable finance, guiding investors toward companies that purportedly align with ethical and sustainable practices. However, as the ESG framework gains prominence, questions arise about its efficacy in truly capturing a company's ethical footprint. This article delves into the limitations of ESG scores and advocates for a more holistic approach to ethical investing.

The Rise and Limitations of ESG Scores

ESG scores are designed to evaluate a company's performance in environmental stewardship, social responsibility, and governance practices. While these metrics offer a structured approach to assessing corporate responsibility, they are not without flaws.

Lack of Standardization

One significant issue with ESG scores is the lack of standardization across rating agencies. Different agencies may use varying criteria and weightings, leading to inconsistent scores for the same company. This inconsistency can confuse investors and undermine the reliability of ESG assessments.

Opaqueness and Greenwashing

The methodologies behind ESG ratings are often opaque, making it challenging for investors to understand how scores are derived. This lack of transparency can facilitate greenwashing, where companies present a facade of sustainability without substantive actions.

Overlooking Ethical Nuances

ESG scores may fail to capture specific ethical concerns, such as involvement in industries like gambling, tobacco, or interest-based financial services, which are prohibited in certain ethical or religious investment frameworks. This oversight can lead to investments that conflict with an investor's ethical values.

Traditional ESG metrics approach ethical screening with significant limitations in standardization, transparency, and comprehensive evaluation. Unlike these conventional methods, LigaIndex™, the proprietary screening engine behind LigaPay™, offers superior standardization across markets, full methodological transparency, and consistent industry exclusion criteria. Where ESG scores typically lack debt and interest screening capabilities, LigaIndex™ employs advanced algorithms to evaluate financial structures against ethical standards. Similarly, while ESG frameworks rarely address religious or ethical compliance needs, LigaIndex™ provides customizable screening aligned with diverse value systems. Perhaps most importantly, LigaIndex™ delivers comprehensive real-world impact evaluation compared to the limited assessment found in traditional ESG approaches.

As illustrated in Table 1, LigaIndex™ outperforms traditional ESG frameworks across all key screening criteria. This comprehensive approach ensures that investors can make truly informed decisions aligned with their ethical values, rather than relying on incomplete or inconsistent evaluation metrics.

The Need for a Deeper Ethical Framework

To address the shortcomings of ESG scores, investors and financial institutions must adopt a more comprehensive ethical framework that goes beyond surface-level assessments.

Incorporating Ethical Finance Principles

Ethical finance emphasizes investments that align with moral values, such as fairness, transparency, and social justice. This approach involves scrutinizing not only a company's ESG metrics but also its core business activities and financial practices.

Emphasizing Real-World Impact

Investors should focus on the tangible impact of their investments on society and the environment. This involves assessing how companies contribute to or detract from societal well-being, rather than relying solely on ESG scores.

Case Studies Highlighting ESG Limitations

Several real-world examples illustrate the limitations of ESG scores in capturing a company's ethical standing:

1. Deutsche Bank's ESG Misrepresentation

Deutsche Bank's asset management division, DWS, was fined €25 million (approximately USD $27 million) for allegedly misleading investors about its sustainable investing practices. This penalty marked the conclusion of a prolonged greenwashing investigation that began in August 2021, following accusations by former sustainability chief Desiree Fixler.¹

2. Vanguard's Greenwashing Fine

Vanguard was fined $12.9 million by the Australian Federal Court for misleading investors about the ESG credentials of its Ethically Conscious Global Aggregate Bond Index Fund. The fund failed to exclude certain controversial industries as promised, highlighting the risk of greenwashing in ESG-labelled products.²

3. Adani Group's ESG Ratings Amid Fraud Allegations

The Adani Group, once featured in over 500 ESG funds, faced allegations of accounting fraud and market manipulation. Despite these serious concerns, the company's inclusion in numerous ESG portfolios underscores the potential for ESG ratings to overlook significant governance issues.³

4. Orpea's Ethical Failings Despite High ESG Ratings

French nursing home operator Orpea enjoyed high ESG ratings until a 2022 exposé revealed widespread mistreatment of elderly residents. The scandal led to a rapid divestment by ESG-focused funds, demonstrating how ESG ratings can fail to anticipate or reflect ethical shortcomings.⁴

5. Wirecard's Collapse Despite Positive ESG Scores

German payment processor Wirecard collapsed in 2020 after revelations of a €1.9 billion accounting fraud. Prior to its downfall, Wirecard maintained favorable ESG ratings, highlighting the limitations of these scores in detecting deep-seated corporate malfeasance.⁵

The Role of Investors and Financial Institutions

Investors and financial institutions play a crucial role in advancing ethical investing practices.

Active Engagement

Engaging with companies to promote ethical practices and holding them accountable can drive meaningful change. This proactive approach goes beyond passive investment based on ESG scores.

Developing Ethical Investment Products

Financial institutions can develop investment products that align with specific ethical frameworks, providing investors with options that reflect their values.

Conclusion: The LigaPay™ Advantage

Traditional ESG metrics, while valuable as a starting point, ultimately fall short in providing the comprehensive ethical analysis that today's conscious investors demand. LigaPay™, leveraging our groundbreaking LigaIndex™ technology, stands at the forefront of this evolution in ethical finance. By integrating multi-dimensional screening capabilities that extend far beyond conventional approaches, LigaIndex™ delivers nuanced insights across environmental stewardship, social impact, governance integrity, and value alignment—all customized to each investor's unique ethical priorities. This proprietary technology represents a significant leap forward, allowing investors to identify opportunities that authentically match their values while avoiding hidden ethical concerns that standard metrics frequently miss. As the financial world increasingly recognizes the limitations of one-dimensional ESG scoring, LigaPay™ is already delivering the next generation of ethical investing solutions—providing investors with the transparency, precision, and personalization needed to build truly values-aligned portfolios in today's complex marketplace.

Bibliography

1. Fixler, D., & Eccles, R. (2025). Greenwashing: In Conversation with a Whistleblower (Version 1). University of Notre Dame. https://doi.org/10.7274/28583123.v1
2. The Australian. (2024). Vanguard to pay multimillion-dollar greenwashing fine. Retrieved from https://www.theaustralian.com.au/business/legal-affairs/vanguard-to-pay-multimilliondollar-fine-over-greenwashing-conduct/news-story/868ab93852825afd049126857a56f0c6
3. Practical ESG. (2023). Adani's Fall Exposes Flaws in ESG Ratings. Retrieved from https://practicalesg.com/2023/02/adanis-fall-exposes
4. DPAM Investments (2024) Costly controversies: case studies. Retrieved from https://www.dpaminvestments.com/professional-end-investor/fr/en/angle/costly-controversies-case-studies
5. Raven Pack. (2022). ESG Controversy Case Study: Wirecard: A story of accounting malpractice. Retrieved from https://www.ravenpack.com/blog/esg-controversy-case-study-wirecard-a-story-of-accounting-malpractice