ESG Stress Test: Economics Model Can Help Companies Navigate Uncertainties from Shifting ESG Regulations and Ideologies

A Conversation in Jakarta

“We put plenty of resources and efforts to meet our ESG compliance. While what we are doing is limited to ESG compliance, there is a general belief in our team that we are doing something good beyond the company. But with the current wars, economic and political downturns, and everything else in between, it does feel that we don’t know where we are going. I wish we can pause a little until the situations can make sense again.”

— A sustainability professional at a mining company operating in Indonesia.

I pondered on what she said for a long time. It was not until a few weeks later that I was able to fully deconstruct it. Her casual and reflective statement encapsulates the ESG environment we are experiencing today: companies are experiencing an ESG stress test, one that is simultaneously shaking both their capacity to comply and their conviction to believe.

The ESG stress test is not a single event. It is the compound effect of geopolitical fragmentation, the uneven withdrawal of global ESG regulations, shifting investor priorities redirected towards artificial intelligence and short-term returns, and an increasingly vocal political opposition that has made “ESG” a contested term rather than a settled framework. In this environment, the companies most at risk are not necessarily those with weak ESG programmes. They are the ones whose ESG efforts rest on foundations that can be shaken: regulatory obligation and institutional belief.

In this article, I argue that a third foundation, one grounded in economics, is what companies need to keep their ESG strategy standing when the other two come under pressure.

Compliance and Ideology: The Two Coloumns of ESG Performance

There are broadly two major factors that influence a company’s ESG efforts. The first is business compliance, stemming from either the ESG policies of business partners or from mandatory national, regional, or international laws. Mandatory ESG laws create company policies that the organisation and its business partners must adhere to. Voluntary frameworks, meanwhile, can drive companies to adopt stronger ESG practices beyond what is legally required.

The second factor is ideology: the degree to which a company’s leadership and workforce genuinely believe that ESG represents sound business strategy, not merely regulatory checklist. Compliance is external and binary. You either meet the standard or you do not. Some may see this is a company's culture. I would humbly argue this is inaccurate because “culture” is a reflection of a company's current habits, whereas ideology is the underlying conviction that drives them. Ideology is internal and directional. It determines how far beyond the minimum a company is willing to go and, crucially, how resilient the company’s ESG commitment will be when external pressure weakens.

To understand how both factors operate in practice, consider Japan’s approach to human rights due diligence. Japan published its Guidelines on Respecting Human Rights in Responsible Supply Chains in September 2022, making it one of the first non-Western countries to develop a formal legal framework on business and human rights. The effect was visible almost immediately: a 2023 report found that nearly 65% of major Japanese companies had implemented formal human rights policies since the guidelines were published. That is a significant compliance response.

Yet the depth of that work tells a different story. The average percentage of total human rights due diligence steps met per company stood at only around 31%. Companies were meeting the letter of the expectation without internalising its spirit. Compliance had moved. Ideology had not followed.

This gap matters enormously under stress. When a regulatory environment becomes uncertain, companies that operate primarily on compliance will default to the minimum. Companies that have built genuine ideological conviction will maintain direction.

The problem in the current moment is that both columns are under simultaneous pressure: compliance frameworks are fragmenting geographically, and ideological conviction is being eroded by uncertainty. My colleague’s words from Jakarta were, in hindsight, a description of precisely that erosion. And erosion of that kind creates the conditions for something more consequential: it removes a company’s willingness to measure what its ESG efforts are actually worth.

The Old Adage: ESG Is a Cost, Not an Investment

The persistent framing of ESG as a cost rather than an investment is not new, but it has found greater political considerations in recent years. One example is an automotive component manufacturer in India whose founder I met. In our conversation, he told a story how he committed his company to a capital-intensive decarbonisation roadmap around 20 years ago, investing significantly in energy efficient manufacturing process, alternative energy substitution, and carbon emission reduction measures. In the short term, the financial story was difficult. Capital expenditure rose, margins compressed, and project timelines extended beyond initial projections. He flagged the investment as revenue erosive. The narrative that emerged, internally and externally, was that his ESG commitment was making his company less competitive.

At a geopolitical level, no example illustrates the power of the "ESG as cost" narrative more starkly than the EU's Omnibus simplification package. The Omnibus amended both the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CS3D) using an explicit rationale of competitiveness: the EU needed to reduce regulatory burden on European businesses. The result of the negotiations reduces the number of entities falling in scope of the CSRD by around 90% and those falling in scope of the CS3D by around 70%. To put that in plain terms: the institution that built the world's most ambitious ESG compliance architecture looked at what it had constructed and dismantled the majority of it, citing costs as primary argument.

The result of an inherently long-term framework, when viewed through the lens of short-term costs, will read as a failure. This is not a design flaw in ESG. It is a measurement flaw in how we evaluate it.

And it is that measurement flaw which makes the case for an ESG economics model necessary.

The Missing Economics

The majority of companies do not yet have the means to express their ESG impact in monetary terms. ESG investments and expenses have attracted considerable scrutiny, frequently labelled as “expensive” or “costly” in board presentations and analyst reports. The benefits, by contrast, occupy a far less prominent position in reporting. They are harder to see, harder to attribute, and harder to put a number on.

This is not entirely true, of course. There are already elements of ESG performance that companies measure and report with some confidence: emission reductions quantified in tonnes of CO2 equivalent, energy savings expressed in kilowatt-hours and translated into cost reductions, water recycling rates converted into operational savings. These are genuine achievements. But they share a defining characteristic: they are almost exclusively savings or efficiency gains. They reduce a known cost. They are, in accounting terms, relatively easy to locate on the existing ledger.

What the ledger leaves out is far larger, and it comprises three distinct categories:

1. The first is value created as a result of robust ESG practice: the revenue premium commanded by verified sustainable products, the talent attracted by a company with a credible social license to operate, the market access unlocked by meeting the ESG requirements of international business partners.

2. The second is value destroyed as a result of inadequate ESG practice: the regulatory fines incurred, the reputational damage that suppresses customer acquisition, the supply chain disruptions caused by undetected labour violations in a company’s tier-two suppliers.

3. The third, and most underappreciated, is what I would call counterfactual value: the monetary worth of negative events that did not happen because a company had the foresight to integrate ESG into its risk management systems. A strike that was prevented. A community conflict that was resolved before it escalated into an operational shutdown. A regulatory investigation that never materialised because the company had already addressed the underlying issue.

The challenge is not that these three categories of value are unknowable. It is that most companies have not yet built the analytical infrastructure to surface them. That is the gap an ESG economics model is designed to fill.

The ESG Economic Model: Making the Invisible Legible

An ESG economics model is not an accounting exercise. It is a strategic decision-making tool designed to translate the full spectrum of ESG impact, including the impacts that do not appear in conventional financial reports, into monetary language that boards and executive leadership can work with. Its value is not primarily in producing a single number. It is in creating a common language between ESG practitioners and financial decision-makers who currently speak across each other.

Let me illustrate what this looks like across the three ESG columns.

Environmental: The Green Steel Premium

Consider the example of automotive component manufacturer I mentioned earlier. Its founder has made early investments in greener production methods and energy efficiency. In the short term, the investment appears costly: higher capital expenditure, longer production cycles, and a technology premium that competitors with older, cheaper infrastructure do not carry. An ESG economics model applied to this investment would calculate not only the costs, but the revenue premium currently being commanded by greener European and Japanese market standard, the future carbon cost exposure avoided, and the value of securing long-term supply contracts with giant European carmaker whose ESG commitments require verified low-carbon inputs. The model converts what looks like a cost into a monetised competitive position.

Social: The True Cost of Industrial Peace

Consider a manufacturing company that invested over five years in a structured worker engagement and grievance mechanism following a period of recurring industrial disputes. Each year of the programme incurred training costs, audit fees, and management time. An ESG economics model would set those costs against the quantified value of production continuity: the revenue that would have been lost to strikes of equivalent duration and frequency to the preceding period, the recruitment and retraining costs avoided by maintaining workforce stability, and the client contract renewals that were explicitly conditioned on verified labour standards in the supply chain. When those numbers are placed side by side, the social investment does not look like a cost. It looks like an insurance policy with a demonstrable positive return.

Governance: What Poor Decisions Actually Cost

On governance, the most instructive example in recent memory is Engine No. 1’s 2021 campaign against ExxonMobil. The activist fund, operating with a stake of less than 0.02% of ExxonMobil’s total shares, won three seats on the company’s board of directors by doing something remarkably simple: it demonstrated, with documented precision, that ExxonMobil’s board had made strategic decisions that destroyed approximately $31 billion in shareholder value over the preceding decade by failing to adequately account for the energy transition. Engine No. 1 did not win on moral arguments about climate responsibility. It won on an economics model that made the governance failure legible in the only language a board cannot dismiss: revenue destroyed.

That is precisely what an ESG economics model can do for companies that deploy it internally, before an activist fund does it for them externally.

How It Plays Out

The green steel and workers’ engagement examples show what monetised ESG value looks like in a positive scenario. But the model is equally important in a negative one, and this is where its relevance to the current ESG stress test becomes most acute.

The empirical case for measuring social ESG performance in financial terms is no longer simply theoretical. In November 2025, UNDP published a five-year quantitative study of 235 global firms examining the relationship between human rights performance and financial competitiveness. The finding was unambiguous: there is no financial trade-off. On the contrary, a 10% improvement in a company's human rights due diligence score was associated with approximately a 1% increase in Return on Assets, suggesting that the long-term operational gains from stronger human rights practice outweigh the upfront costs. The report was framed, understandably, as a myth-buster: human rights and competitiveness are not in opposition.

But dispelling a myth and equipping a company to act on the opposite are two different things. A correlation across 235 firms tells a board that the research is on their side. It does not tell them what their specific investment in worker engagement is worth to their specific operations, in their markets, with their supply chain risks. That translation from aggregate proof to company-level action is precisely what an ESG economics model is designed to make.

Consider what happens when a company, responding to the pressures described earlier in this article, decides to scale back or pause its ESG efforts. The immediate saving is visible: headcount reduced, programme costs cut, reporting obligations simplified. What is not immediately visible is what leaves with the people who carried that function.

ESG-competent professionals carry with them the capacity to detect emerging risks, the relationships with peers, suppliers, and community stakeholders that provide early warning of social tensions, the technical literacy to evaluate new regulatory developments before they become compliance crises, and the strategic capability to identify investment opportunities in sustainable infrastructure, circular economy models, and green finance instruments that competitors without that capability will be slower to see.

When those people leave, the company does not merely lose a cost centre. It loses its peripheral vision. The risks that ESG was designed to identify do not disappear because the ESG team has been downsized. They continue to accumulate quietly, in supply chains, in community relationships, and in the regulatory pipeline. The difference is that the company is no longer looking for them.

An ESG economics model applied to this scenario would attempt to quantify what that peripheral vision is worth: the probability-weighted financial exposure of undetected supply chain risks, the revenue that could have been generated by ESG-enabled market access in sustainability-linked procurement frameworks, and the talent acquisition cost of rebuilding ESG competence when the organisation eventually recognises it cannot operate without it. In almost every case, the cost of rebuilding exceeds, often significantly, the cost of maintaining.

The irony is one that any risk manager should find familiar. The very function designed to prevent expensive surprises is being eliminated in an effort to reduce costs, at the precise moment when the external environment is generating more surprises than usual.

Conclusion: Stress Testing During A Difficult Period

While ESG mechanism is synonymous to looking at past events, thanks to audit and certification requirements. At its full potential, ESG is an instrument of foresight. Its core proposition is that companies which look beyond the next quarter, which scan for risks in their supply chains, communities, and governance structures before those risks become crises, and which position themselves ahead of regulatory, market, and societal shifts, will outperform those that do not. The entire mechanism of ESG, from climate scenario analysis to human rights due diligence to board composition standards, is designed to give companies the ability to peek into the future: to find what will disrupt them, and to identify what business opportunities can be taken to gain first-mover advantage if they move fast enough.

In a recent report by The Remedy Project, the case of Taiwan’s manufacturing sector serves as a stark example of why this foresight is critical: despite Taiwan having strong formal legal protections , the 2025 Withhold Release Order (WRO) issued against a manufacturer revealed a systemic failure of early detection where reactive, factory-level audits missed the compounding structural drivers such as recruitment debt, employer-binding visa systems, and fear-based controls that ultimately led to operational collapse.

Similarly, a carbon-intensive sector may view global warming and energy transition measures as a threat to their traditional revenue streams. However, armed with the right ESG capabilities and model, its Directors can identify new and emerging investment opportunities such as Carbon Capture, Utilization, and Storage (CCUS) and Carbon Credit Trading and Offsetting.

The paradox of the current moment is that at precisely the time when geopolitical uncertainty, uneven regulation, and technological disruption make that foresight capacity most valuable, companies are scaling it back. They are pausing programmes, reducing ESG headcount, and allowing their ESG mechanisms to run on autopilot, responsive to compliance requirements but no longer actively scanning for what is coming. In doing so, they are rendering their ESG strategy useless for the very things that make it valuable, trading the long-term, protective "insurance" of proactive, structural analysis for the short-sighted, and ultimately fragile, comfort of automated compliance.

The ESG economics model I have outlined in this article is not a silver bullet. It will not resolve geopolitical uncertainty or settle the political contestation that has made “ESG” a polarising term in certain markets. What it can do is provide a third foundation for ESG commitments that compliance and ideology alone cannot guarantee in the current climate.

My colleague in Jakarta wished she could pause until things made sense again. I understand that instinct. But the companies best positioned to navigate this period of uncertainty are not the ones that pause. They are the ones that invest in the clarity to see through it. And the clearest instrument they have for doing that is knowing, in concrete monetary terms, what their ESG strategy is actually worth.

When a board asks why the company is maintaining its ESG investment during a period of economic pressure, the answer should not be “because it is the right thing to do” or “because we are required to.” Those answers, however valid, are precisely the ones that come under pressure when the external environment turns hostile. The answer should be: because we have measured what it is worth, and we know what it costs us not to have it.

That is the language of a ESG economics model. And that is the language in which ESG will survive its own political moment.

About the Author:

Indras Ghosh is an independent expert specialising in corporate ESG and human rights due diligence and experienced in helping organisations and businesses implement responsible business practices.

The views expressed in this article are his own.

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Email: indras.ghosh@outloook.com