Sustainable investing doesn’t work. ESG is just marketing. Impact investing is a club. We’ve heard it all, and after decades assessing and carefully considering the underlying issues, we firmly believe those criticisms are . . . partly true.
One of us (Rob) has spent thirty-five years in financial markets, starting as an economist, moving on to portfolio management, and eventually running an impact focused hedge fund. The other (Aniket) has a PhD in economic geography and spent years in economic development before finding a calling on the sell side as a #1 ranked II analyst. Rob was an investor who saw the promise of a policy lens, and Aniket was a policy advocate who saw the promise of deploying private capital. Both of us believe in rigorous analysis, empirical methods and open debate. Neither of us started our careers intending to “do well and do good”. And yet despite our backgrounds, or perhaps because of them, we both landed as passionate advocates for solving many of the world’s challenges with hard-nosed capitalism.
What we have found over the years is that so-called sustainable investing, when executed in the context of rigorous, long-term financial thinking, works. What worries us is that people increasingly believe it does not, not because it has failed, but because it has been too-often misguided.
Let us explain.
It is clear to us, and to many others across the investing spectrum, that mega-trends like climate change and artificial intelligence, as well as the accelerating pace of growth in developing economies will fundamentally reshape the global economy. In response, we believe the capital being deployed today should be allocated in a way that ensures the best long-term outcomes for both investors and the global population. We know that is not a wholly original idea.
We believe that capitalism and the tools that enable it in the financial markets offer the best opportunity to drive resources efficiently. That requires capital allocators – corporates, fund allocators, and asset managers to make highly informed investment decisions as responsible fiduciaries for the financial gain of their beneficiaries (i.e. shareholders, customers, pensioners). Those beneficiaries both benefit from and influence the decisions of those same allocators. Thus, capitalism can only succeed if it is supported by an investors’ framework which embraces a long-term approach to the creation of global wealth, and prosperity for all. And that is, by definition, sustainability.
The failure to envision economic success through that long-term lens has brought painful lessons for hundreds of years. The 2008 sub-prime mortgage crisis was just one example in a long list of events when unlimited or lightly regulated access to capital caused massive social and financial pain. With that idea as a caution, we note that climate change is fundamentally an economic challenge, with most of the world’s environmental externalities not being priced into decision making of policy makers or investors. To be clear: economic success requires long-term thinking – period.
But despite that logic, investing to achieve social and/or environmental good alone is too frequently unsuccessful. With trillions of dollars in “sustainable investing assets” in the financial markets, we have seen that these endeavors can succeed but too often don’t. The successes are good businesses. The others generally fail because many traditional socially responsible investors did not consider the fundamentals of good investing. They wish for something to be a viable business rather than applying robust financial and economic analyses to determine if it is. That can’t continue.
We are writing this essay because we are concerned about the field of sustainable investment and want to defend it by improving it. Ultimately, we firmly believe that sustainable investing and impact investments not only have a future within capital markets - indeed they are the future of capital markets. But they will succeed if and only if seen through the prism of long-term thinking and implemented with the tools of traditional financial analysis. To achieve this goal, there are 6 tactical steps we see as crucial – in what follows we outline the challenges to date and a path forward for the industry.
A Quick Historical Tour of the “Sustainable Investing” Space
Sustainable investing is not a new idea—it has evolved over decades, shaped by shifting societal values, regulatory frameworks, and market dynamics. Its roots trace back to exclusionary investing, where religious groups and ethical investors sought to avoid profiting from industries, they deemed morally objectionable. The Quakers excluded investments in slavery and weapons as early as the 18th century. In the 20th century, the anti-apartheid movement catalyzed a wave of divestment from South Africa, demonstrating how capital could be wielded as a tool for social change. These early efforts were not about maximizing returns—they were about aligning investments with values.
The modern ESG (Environmental, Social, and Governance) framework began to take shape in the early 2000s, when the International Finance Corporation (IFC) published the landmark report Who Cares Wins in 2004. This report argued that integrating ESG factors into capital markets would lead to better societal outcomes and improved financial performance. Crucially, it framed ESG not as a moral imperative, but as a risk management tool—an approach that resonated with institutional investors and fiduciaries. ESG was initially a language for identifying long-term risks and opportunities, from climate exposure to governance failures.
That same year, Generation Investment Management was founded by Al Gore and David Blood, the former head of Goldman Sachs Asset Management, marking a pivotal moment in the evolution of the field, and shifting the conversation from risk mitigation to return generation. Their investment philosophy emphasized long-term value creation through deep integration of sustainability factors into fundamental analysis. It was a clear signal that sustainability could be a source of alpha—not just a constraint. Today, with over $31 billion in assets under management, London based Generation is one of the top 100 equity investment managers by size in the world.
The mainstreaming of sustainable investing accelerated in the 2010s. The New York based not-for-profit JUST Capital emerged in 2014, reinforcing the idea that stakeholder alignment drives performance. Co-founded by Paul Tudor Jones and others, JUST Capital ranks companies based on how they treat workers, communities, and the environment - bridging public sentiment and market behavior, and showing that “just” business is better business, both ethically and financially. So struck was co-author Rob by the mission of JUST Capital that he stepped away from a successful 25 years on Wall Street and joined as Head of Research, leading the team’s effort to construct the inaugural JUST Ranking and JUST Index. In a similar though mirror-image decision, Aniket left his role at the UN Sustainable Development Solutions Network – a UN-affiliated policy think tank – to go to Oppenheimer Funds as Head of Sustainable Investing.
The Business Roundtable’s 2019 statement redefining the purpose of a corporation to include customers, employees, suppliers, and communities marked a symbolic shift away from shareholder primacy. These interventions, even those that have been tempered more recently, helped legitimize sustainable investing as a core business concern, not a niche interest.
And, at the same time, starting in roughly 2007, a smaller but equally dedicated group of investors was forming around ideas developing at The Rockefeller Foundation. The concept, deemed impact investing, focused on allocating capital to specific initiatives with the intention to generate positive, measurable social or environmental outcomes. Today, many impact investments become the pathways through which sustainable initiatives are implemented.
But as the field grew, so did the scrutiny. The political backlash against ESG investing in the early 2020s was organized, swift and multifaceted. Some critiques were rooted in legitimate concerns: Was ESG being used as a marketing tool rather than a rigorous investment process? Were asset managers overstating their objectives and results? Other concerns were grounded in ideological opposition to specific social issues, while a vocal subset of opponents were interested in promoting fossil fuel, and saw the growing emphasis on “E” as a threat to traditional energy markets. The result was a wave of anti-ESG legislation, divestment mandates, and public skepticism—particularly in the United States.
Despite the current stress in the field, this evolution—from exclusion to risk management to return generation—illustrates the adaptability of sustainable investing. Its focus has shifted in response to changing market conditions, societal expectations, and investor priorities. The current moment, marked by backlash and introspection, should be seen not as a death knell but as an opportunity for refocus.
The Best of Times, the Worst of Times
The sustainable and impact investing space is clearly in a moment of deep reflection – and some would even say crisis. According to Morningstar, total assets in global sustainable assets effectively flatlined in 2023 and 2024 at approximately $3 trillion, although moderately recovered in Q2 2025. New fund launches have decreased by over 60% since 2022.
The obvious signs of stress are in the resources dedicated to the sector. Investor coalitions such as the Glasgow Financial Alliance for Net Zero (GFANZ) are seeing significant membership decline. Fund flows to “sustainable products” have decelerated or even dried up around the world – particularly in the public markets – calling into question the value of this field for the world’s largest asset allocators. Most starkly we see the human capital focused on this field being consolidated.
Yet, the momentum behind longer term allocations of capital continues to drive major progress toward a sustainable global economy.The International Energy Agency (IEA) estimates that the shift to lower carbon output has already shaved >1 °C off projected warming over the period from 2015-2024, lowering long term expectations from c.3.5 °C a decade ago to c.2.4 °C today. Utility-scale solar ($24–$96/MWh) and onshore wind ($28–$96/MWh) remain the lowest-cost sources of new electricity generation in the U.S., significantly undercutting new natural gas combined cycle plants ($39–$101/MWh). We recognize that LCOE, or Levelized Cost of Energy, is an incomplete measure of true system value, (i.e. it doesn’t capture critical system-level costs such as firming, transmission upgrades, or storage requirements), however the differential is still indicative of the value gap.
On the consumer front, electric vehicle (EV) sales topped 17m in 2024—accounting for more than 20% of new car sales globally, with China contributing 11 million EVs (c. 50% of its new-sales) according to the IEA.
Meanwhile, the Science Based Targets Initiative (SBTi) reports a 30% increase in submissions from corporates through Q1 of 2025, of with 84% of reporting public companies maintaining or increasing their decarbonization targets.
We could go on, but our point is simple: this dichotomy between a challenging near-term environment for sustainable investing alongside great progress toward long term sustainability goals in the real economy needs to be appreciated as the starting point to a discussion about the future of sustainable investing.
Why Sustainable Investing Can’t Seem to Move Forward
Our conclusion is therefore that sustainability itself is not (yet) in crisis, and the goals remain achievable. But the sustainable investing infrastructure is deeply stressed and in need of correction. We believe this is the case for four main reasons:
First, there is a lack of clarity and agreement on both the goal and the mode of achieving objectives. Is the goal to make the world a better place, reverse the course of climate change, resolve the damage from climate change, address personal and global economic inequality and so on? Or is it to maximize investment returns by mitigating the potential impediments to long-term profits? We have seen competent professionals use both arguments, sometimes with conviction, and unfortunately at times with confusion. We will assert that both objectives are valid and complimentary. It is the lack of clarity around purpose which has confused the messaging and implementation of the idea from the get-go.
Second, there has been an extreme over-reliance and excessive focus on ratings and reports. As sustainable investing gained traction a decade ago, the financial services sector developed an obsession and overreliance on two related issues: using third-party ESG ratings and disclosing sustainability “performance”. The challenges and issues with ESG ratings have been well documented, and we don’t intend to re-hash those debates here. Similarly, we will limit our comment on sustainability “disclosure” to the observation that the enthusiasm of the sustainability narratives is frequently not matched by the rigor of the analysis in annual sustainability reports. resulting in confusion for even the most dedicated investors.
At Resolution Investors, a London-based global equity fund manager that launched in this fall, we have a clear-eyed view of third-party ESG ratings: they offer a potential warning system for outlier performance and may offer a consistent framework for certain regulatory reporting frameworks, like SFDR. However, they are not determinative. Our investment approach incorporates similar concepts, but through a proprietary analysis framed by our belief that the objective of lower carbon output is a critical long-term driver of profit margin in many sectors.
The Jefferies’ team has long cautioned against the use of ESG scores in an investment process, believing that ratings and exclusions are the ESG of the past. To that point: in Jefferies’ 2022 monthly report on MSCI’s ESG Upgrades, Downgrades, and Performance, we evidenced upgrades or downgrades in ESG ratings actually show an inconsistent correlation with stock performance, underscoring ratings’ limited utility in driving returns.
Third, the impact of this fundamental confusion was exacerbated by overzealous marketing and “hype” created by the investor community – in particular. Corporates raced to attract investors on the promise of superior earnings performance from sustainable initiatives, while fund managers were following right behind them, labeling investment products in an effort to attract AUM flows for investing in the most sustainable or green companies.
And fourth, all of this growth was happening under a macro cycle that facilitated outsized risk taking. The sustainable investing boom coincided with – and we would argue, was facilitated by - a period of historically low interest rates and high financial liquidity which lowered return hurdles and encouraged irrational risk-taking. A higher interest rate regime has now challenged the prospects of key segments of the energy transition and other large scale infrastructure projects related to sustainability, all of which are heavily reliant on debt-financing. The world had perhaps a never-to-be-seen-again moment of $20 trillion of negative yielding real interest assets, and its impacts were profound on investor behavior, including those with sustainability mandate.
A Path Forward: Clarifying the Goal and Embracing the Edge of Sustainable Investing
So - do sustainable and impact investing strategies have a future? Perhaps. We hope so. For the field to thrive, however, we believe that proponents need to make a dramatic course correction, starting with two immediate changes.
First, and most importantly, the sustainable investing industry must define its primary goal with crystal clarity: we believe that goal is maximizing long run risk-adjusted returns. That’s it. Sustainable investing simply must establish itself as a process for providing investors with better long-term returns than possible from traditional investing strategies. Superior market returns will ensure both a broader constituency and a sustained business case for fund managers. This is not farfetched: we believe the lens of sustainability provides a valid portfolio constraint, and when applied with discipline is no less, and potentially more valuable than established frameworks such as growth vs value, quality, or sector specific investments.
Second, we need to retire the concept of standalone “sustainability/ESG funds.” We believe sustainable investing is largely a matter of investment and research process, not outcome, especially in the public markets. Sustainable investing is less about achieving specific environmental or social outcomes and more about integrating material long-term risks and opportunities (intangibles and externalities) into traditional financial analysis. The relevant general question is whether a fund manager systematically considers how issues like climate risk or social disruption affect earnings trajectories, competitive positioning, and capital allocation. The distinction is subtle but critical: sustainability should be embedded within investment philosophy and process—not isolated into a marketing silo.
The natural question then arises - how is sustainable investing any different from traditional investing? We think there is one key differentiator: sustainable investing strategies should be defined by an unwavering focus on valuing the long-term earnings trajectory of companies and industries by assessing the interrelated relationships between company operational performance and associated planetary and social impacts. There is no longer a debate about the reality of climate change, so the question for investors is: how does a company’s operational footprint today positively or negatively influence the planet, and what are the implications of that planetary or societal change in the company’s own earnings performance over the long term? Financial markets are an efficient discount mechanism that links the long-term to the present, so the sustainable investment community should be obsessed with this connection between the present and the long-term.
At this point, the reader may be yawning. “What, this is really your big idea? Long-termism?” We admit there is little “new” about professionals in the sustainable investment space and the broader investment community talking about the long-term. However, after hundreds of conferences and white papers addressing “long-termism”, and incredible organizations like FCLT – we don’t see a systemic transmission mechanism between long-term thinking and the day-to-day decisions of financial market participants. Broadly speaking, despite an abundance of long-term projections and claims of “core” portfolio holdings, the quarterly earnings call still dominates corporate messaging, executive compensation, and investor decision making.
A Simpler Framework to Evaluate Potential Returns
We would offer this simplified framework: the sustainable investment community should focus on the terminal value of a company using a traditional discounted cash flow (DCF) analysis, a basic framework ignored by many in the discourse around sustainable investing. Terminal value is simply the present value of all the cash flows a business will generate after the usual forecast period (often year 5 and onward). This terminal period typically represents the bulk of a company’s value – as much as 70% or more of the total value - and sustainable investors should in theory be living in that 70%).
The terminal value of a company is highly sensitive to two variables in particular: the long-term growth rate and the discount rate, both of which are deeply influenced by how a company manages its intangible assets and its externalities. This issue of externalities is critical - they are central to understanding how near-term corporate decisions shape long-term value.
Decisions that mitigate negative externalities or enhance positive ones can strengthen stakeholder trust, reduce regulatory and reputational risks, and open new markets—ultimately feeding back into financial performance. Conversely, ignoring these dynamics can erode long-term value, even if short-term metrics appear strong.
Therefore, the sustainable investment community has a critical role to play in shaping and scrutinizing these inputs. Intangible value and externality analysis should be at the core of how we assess long-term corporate value—because they are the mechanisms through which today’s decisions echo into tomorrow’s outcomes.
A Prescription for What Ails Us: Tactical Steps to Revive the Sustainable Investing Sector
That framework needs execution - if sustainable investing truly is to become truly focused on long-termism, here are a few practical steps for practitioners to take:
First, asset allocators with a universal mandate – insurance companies, pension funds, sovereign wealth funds, endowment/foundations, and family offices – should match their investment strategy to their liabilities. These are the longest time-horizon institutions in capital markets and arguably in the economy as a whole. Most of these institutions have liabilities that span generations. And yet, we see time and again that this community operates needlessly with short-term orientation.
Asset owners should be encouraging their investors – both internal to their institutions and external – to have long-term orientations in their capital allocation. If asset allocators extend the time horizons of their asset managers, then asset managers would be incentivized to extend the time horizons of how they evaluate corporate performance. We are not the first to wish quarterly earnings announcements a quick trip to the dustbin. Companies should be reflecting strategies for the next decade, not the next deal. And the sustainable investment community should be encouraging this development fully, particularly those who sit within the asset allocator community.
Second, portfolio managers incorporating a sustainability mandate, and asset owners allocating to those managers should demand rigorous analysis and substantive performance reporting. To be clear, this is not a call for standardization. It is a demand for transparency and authenticity. Sustainable investors, like all investors, should embrace only those metrics which accurately and authentically assess performance on sustainable outcomes which are directly relevant to the portfolio outcomes desired. This also requires a similar expectation is met by Corporates reporting on their climate and social goals. Like any set of KPIs, the issues measured must be relevant to the outcome desired; and, like any financial reporting framework, sustainability measurement is not an outcome in itself – it is a tool used to assess performance.
Third, let’s all become macroeconomic and policy specialists. The sustainable investing community must sharpen its grasp of macroeconomic and market cycles. Much of the current-day enthusiasm for sustainable assets was born in an era of ultra-low interest rates and benign price inflation, which inflated investor valuations and masked the fragility of certain business models. Today’s world — marked by tighter monetary policy, supply chain shocks, energy insecurity, and shifting geopolitics— requires a more informed and disciplined understanding of the macro dynamics shaping sectoral winners and losers. Sustainable investing cannot operate in a vacuum; it must integrate a clear-eyed view of the broader economic backdrop to avoid repeating the missteps of the past cycle and to ensure durability of performance through future market regimes.
Relatedly, it is now widely accepted that public policy is one of (if not) the biggest drivers for sustainable investing. Successful sustainable professionals will need to develop expertise and understanding around public policy. This includes the very real trade-offs at play for various policy decisions.
Fourth, stay focused on climate change and the energy transition, but engage with this topic through the lens of physical and technological change. Climate change adaptation and resilience, which is already significant and will be further necessitated by physical climate shocks, can absolutely impact the terminal value of a company. At Resolution Investors, we invest in companies leading their operations through a transition to lower carbon output, and we also see significant opportunity in companies providing both adaptation and resilience solutions. These include products as common as retrofit industrial insulation, as complex as energy reducing industrial electrical infrastructure and AI enabled crop management. Major technological shifts – brought about by either corporate R&D or government initiative – can make certain sectors boom and others go obsolete in the not-too-distant future. A greater focus on these topics, together with a focus on carbon foot printing would be a welcome change to the sustainable investment space.
Fifth, the future of work should become a much bigger part of the conversation. Human capital is the largest spending item for most companies but gets the least amount of attention from investors. Institutional investors must adopt a structured, data-driven framework to evaluate corporate disclosures, alternative datasets, and management commentary. Over the past five years, from the Great Resignation in 2021 to the surge in labor strikes and unionization efforts in 2024—we have witnessed slow and steady improvement in how investors measure the impact of social facts on corporate performance.
There is a plethora of academic research that shows the 100 Best Companies to Work For outperform the market, and particularly during economic downturns.
To validate this thesis, the Jefferies Sustainability and Transition Strategy team has replicated the studies and shown that the 100 Best Companies to Work For have outperformed an equally weighted S&P 500 by over 2,000% across the past 28 years. To deepen this analysis, Jefferies leverages alternative datasets such as Glassdoor reviews and job postings to identify sector- and stock-level trends and corroborate management commentary. Jefferies applies its human capital framework to AI adoption by analyzing job posting trends across entire workforces, with a focus on functions like software engineering and sales & marketing which can be automated. We believe the wise investor will pay heed.
Sixth and finally, sustainable investors should position themselves as true technology leaders - and that ethos should become core to the sustainable investing community. There may be no other element of economic development which impacts the long-term growth rate of a company more than its interaction with technological shift. We are seeing this in the moment through climate technologies and artificial intelligence tools, where major umbrella-technologies are driving trillions of dollars of equity value. And we have seen this before with major technological developments, including the internet, telecommunications and fiber. A sustainability mandate, by definition, must anticipate and capture the evolving future, and technology investing is now central to that thesis.
What Comes Next?
Crisis breeds opportunity, and the sustainable investment community must use the current moment of stress to fundamentally reorient itself. We do not believe the current contraction in the sector is a sign of demise, nor do we think it is necessarily a poor outcome. As generalist investors shy away from the sustainability theme, we will more readily see the authentic sustainability strategies dedicated to a disciplined portfolio strategy with clearly defined goals. As mainstream asset owners and allocators diminish their commitment to sustainable investing, we will similarly see longer term allocations with higher commitment. We believe the result will be a more concentrated, dedicated and knowledgeable sector, with highly focused allocators making long-term commitments to fund managers investing in long duration assets with higher long-term return potential. What will come of it all is a smaller, leaner but more value-added contribution to the global investment landscape, which will empower sustainable investors to demonstrate why asset owners should pay heed to sustainability and no longer demand that the world must. It will result in a field of practice and community of practitioners who are laser focused on improving investment outcomes through focusing on the long term. This may be the biggest arbitrage in the financial markets today, where the analytical framework is becoming shorter-term with each quarterly earnings season.
Who would have thought – long-termism as the contrarian bet. But that just may win the day.
Robert Brown, director of climate research at Resolution Investors and Chief Research Officer at Impact Evaluation Lab
Aniket Shah, Global Head of Sustainability, Transition and Washington Strategy at Jefferies
