Over the past decade, environmental, social and governance (ESG) issues have gained significant global attention among policymakers, business leaders and the public. There is a growing consensus that ESG is requires greater focus on driving long-term value creation and adherence to principles. The AlixPartners Disruption Index 2025 report shows that 76 percent of CEOs confirm that ESG efforts drive positive change, with 56 percent expecting positive revenue impacts and 61 percent predicting increased profitability from ESG initiatives in the next 12 months. Despite the positive perception of ESG, companies are also facing pressure from political opposition, leading to a reassessment or suspension of some ESG commitments. The increasing complexity of regulations is also creating a sense of “compliance fatigue.”

Definitional ambiguity and measurement problems

Despite its growing importance, it remains ESG definition still relatively ambiguous. Different stakeholders – including regulators, businesses, investors and NGOs – have not yet agreed on a common understanding of the term. Some ESG factors, such as CO2 emissions or water consumption, are relatively easy to measure. However, others, such as measuring biodiversity or a company’s impact on health and well-being, are much more difficult to quantify. As a result, companies and market participants may prefer more easily measurable factors, thereby failing to holistically assess their overall ESG impact. These difficulties are also reflected in the considerable degree of disagreement in ESG ratings issued by different agencies for the same company, leading to “aggregate confusion”.

Regulatory developments and litigation risk

Companies need to ensure that they have adequate measures in place to meet regulatory expectations and proactively identify issues, for example through ESG investigations. New regulatory changes, such as the revised EU Corporate Sustainability Due Diligence Directive (CSDDD), which entered into force on 25 July 2024, aim to promote sustainable and responsible behaviour by companies in their operations and global value chains. In addition, the European Commission’s first Omnibus Package of February 2025 simplifies existing sustainability regulations, including the CSDDD and the Corporate Sustainability Reporting Directive (CSRD).

In addition to regulatory enforcement, companies may also be exposed to ESG-related litigation. A common risk is "greenwashing", when companies are accused of making false, misleading or exaggerated claims about their ESG records or practices. This can include misrepresenting diversity and inclusion data, failing to meet board diversity statements, or misleading statements about investments in certain sectors. In the first quarter of 2025, the global sustainable funds market saw net capital outflows of $8.6 billion, its worst quarter on record, highlighting the challenges in the space.

The potential impact of poor ESG performance on stock price: An empirical analysis

Academic studies have examined the impact of ESG news and events on stock performance, with negative ESG news is associated with negative stock price reactionsAnalysis of the three incidents using an “event study” yielded three key insights:

• Disclosure of information about ESG performance and related investigations can have a material, negative impact on companies' stock returns.
• Various ESG incidents can affect the stock returns of affected companies in to widely varying degrees.
• The impacts of investigation-related notifications may vary in different phases the same lengthy case.

External ESG investigations showed significant differences in the impact on stocks. For example, an incident involving The global customer data breach led to a sharp stock reaction of -5.6 percent, while the announcement of an external investigation into sexual harassment of female workers in the US had a smaller but still material reaction of -0.7 percent. These impacts, while different, are statistically highly significant. Internal ESG investigations can signal proactivity and transparency. In one case study, concerning consumer rights, the initial announcement of the appointment of an external expert led to positive reaction of shares by +2.0 percent. However, subsequent announcements of preliminary and final findings of serious violations of consumer rights led to decreases of -1.7 percent and -1.4 percent, respectively. The total impact of all four phases was approximately -1 percent. This suggests that a proactive approach to internal ESG investigations can help mitigate the potential negative impact ESG incidents on the share price.

Recommendations and conclusions

The analysis suggests several important considerations for risk management in enterprises:

• Risk management: ESG risks should be integrated into the organization's overall risk management framework, with annual comprehensive assessments of all types of risks.
• Compliance: Compliance programs should adequately cover ESG risks in a changing environment.
• Investigations: Companies should be proactive and use independent bodies to objectively review processes for control failures. ESG reporting and risk monitoring should be aligned with legal and compliance areas for timely action.
• Dispute resolution: It is important to carefully consider dispute resolution options and take into account the potential costs, both financial and reputational. Early engagement of experts is key to managing litigation risks. Spring