The finance sector has “sprinkled ESG fairy dust” on products that do little to account for environmental, social and governance risks, said Paul Clements-Hunt, adding that ESG funds in jeopardy include those that track benchmark indexes, some of which invested in Russia.

“Anybody who uses ESG, sustainability or green purely as a marketing device is really heading for trouble,” Clements-Hunt said in a telephone interview from Nairobi where he runs an advisory firm called Blended Capital Group. “You’ll see a developing queasiness from marketing departments where, perhaps, ESG funds aren’t all what they’re cracked up to be.”

The warning comes as Russia’s invasion of Ukraine exposes some of the dubious choices money managers selling ESG investments have made. Such funds held about $8.3 billion in Russian assets just before the war, including holdings in state-backed energy giants, as well as bonds sold by Vladimir Putin’s government, data compiled by Bloomberg show. That’s on top of a growing list of ESG products that hold oil, coal and weapons.

ESG has ballooned into an industry embraced by the giants of Wall Street and Europe’s financial hubs, with the label now slapped on everything from exchange-traded funds to loans and credit-default swaps. The global market adds up to about $40 trillion of assets, according to analysts at Bloomberg Intelligence.

“It’s a whirligig, a frenzy, a marketing mania,” Clements-Hunt said.

The 56-year-old said both institutional and individual investors no longer accept all ESG claims at face value. They’re “far more demanding, far more questioning of what is and what isn’t real,” he said.

Researchers at Morningstar Inc. recently stripped the ESG tag off about 1,200 funds— equivalent to more than $1 trillion in assets under management — after finding they didn’t deserve the label. Even with that correction, ESG funds still manage about $2.7 trillion, Morningstar reported. Regulators in Europe have introduced rules designed to ensure that funds live up to their sustainability claims.

Clements-Hunt and his team created the term ESG in 2004 when he was working at the United Nations. He’s keen to stress that ESG is often wrongly conflated with ethical investing. He said the strategy involves measuring investment risks tied to issues such as climate change, human-rights violations in supply chains and poor corporate governance. And by addressing those challenges, there are opportunities to make money, he said, citing climate technologies as an example.

Clements-Hunt, who calls himself a “card-carrying capitalist,” has worked on sustainability since the early 1990s. He ran the United Nations Environment Programme Finance Initiative, where his goal was to get investors and bankers to put money toward addressing issues such as environmental degradation and income inequality.

On the surface, it’s been a huge success. Last year, financial institutions representing $130 trillion in assets committed to cutting their greenhouse gas emissions. And everyone from BlackRock Inc. to Deutsche Bank AG to HSBC Holdings Plc now says ESG is crucial to their business.

Clements-Hunt said he welcomes growth, but he also sees parallels to the dot.com bubble and the overheated mortgage market that proceeded the global financial crisis in 2008.

He isn’t the only skeptic. Jerome Dodson, the retired founder of Parnassus Investments — the biggest firm dedicated to ESG — in January described the boom in ESG as “disconcerting.” Last year, Matt Patsky, who runs one of the world’s oldest socially responsible investing firms, Trillium Asset Management, referred to the sector as the “wild west” and ripe for a crackdown. And Tariq Fancy, BlackRock’s former head of sustainable investing, said that ESG funds are mostly about marketing and have little real-world impact.

The shakeout, when it comes, will lead to more “honesty in markets,” Clements-Hunt said. “Like any form of investment, if there’s lazy analysis and the eyes are too much on the money, then you will fail.”