git diff displays colors incorrectly

You're seeing the escape sequences that tell the terminal to change colors displayed with the escape character shown as ESC, whereas the desired behavior would be that the escape sequences have their intended effect.

Commands such as git diff and git log pipe their output into a pager, less by default. Git tries to tell less to allow control characters to have their control effect, but this isn't working for you.

If less is your pager but you have the environment variable LESS set to a value that doesn't include -r or -R, git is unable to tell less to display colors. It normally passes LESS=-FRSX, but not if LESS is already set in the environment. A fix is to explicitly pass the -R option to tell less to display colors when invoked by git:

git config --global core.pager 'less -R'

If less isn't your pager, either switch to less or figure out how to make your pager display colors.

If you don't want git to display colors when it's invoking a pager, set color.ui to auto instead of true.

Improving upon Gilles' answer, you can keep your old $LESS options by using this in your git config (for example in ~/.gitconfig):

[core]
pager = less -+$LESS -FRX

You could also see this output if you have Busybox. Alpine Linux is a good example of a popular distro that uses it. See https://wiki.alpinelinux.org/wiki/Alpine_Linux:FAQ#How_to_enable.2Ffix_colors_for_git.3F

A simple way to know if you currently use Busybox is to run:

realpath `which less`

Or if you use fish shell

realpath (which less)

If the output is /bin/busybox, then you can solve your problem by installing gnu less.

On Alpine:

sudo apk --update add less

The command will be different depending on you distro / package manager.