By Chantal Marx
Over the last three years, sentiment towards sustainable or environmental, social, and governance (ESG) investing has notably shifted. From our perspective, the reasons for this have primarily been:
Additionally, new investment thematics such as the AI boom and emerging asset classes such as cryptocurrencies have also diverted attention away from these concepts.
At first glance, it may seem that investors are not as focused on sustainability as before, but we contend that the shift has not been away from sustainability and ESG but rather in how sustainability and ESG concepts are communicated, quantified and implemented. Indeed, while demand for some labelled products may have weakened, financially material ESG factors have become more embedded in mainstream investment analysis.
From greenwashing to true commitment
Investors have become more attuned to potential greenwashing as it can have a major negative impact on asset prices and even result in reputational damage in the case of investment managers. In a recent study by Xu, Tse, Geng, Liu and Potter (2025), the authors found a negative correlation between greenwashing "news" and stock market reactions, particularly where the allegations were supported by concrete evidence. This means that greenwashing can have a negative impact on share prices.
Being aware of this risk, asset owners are no longer just looking at what a company is saying, but focusing on what a company is doing as it relates to ESG issues. For example, an energy company should not receive undue credit for promoting its renewable plans while still directing most of its capital expenditure towards oil and gas.
Additionally, materiality has become a very important consideration when looking at how a company performs from a sustainability perspective. For an energy company, the environmental component is arguably more important on a relative basis than it may be for a bank, where governance will carry more weight as it relates to long-term sustainability of the business.
Finally, investors are placing pressure on ratings agencies to adopt more rigorous analysis when determining ESG scores. Points for simply disclosing ESG risks no longer suffice.
From politicisation to "keeping the main thing the main thing"
In examining responses to ESG politicisation, Hilson (2024) adapts Dür, Hamilton and De Bièvre's (2024) trade-policy framework into three broad categories: confronting, separating and dodging. In our view, none offers a complete or durable solution to the politicisation of ESG.
In the current political context, confronting (or debating) critics of ESG directly has the propensity to deteriorate into circular discussions. Separating (splitting the E from the S and the G) also has limited scope for success since eliminating any of these factors greatly alters the analysis of longer-term sustainability. Dodging (continuing with ESG integration while avoiding the terminology) may be the least combative response. However, it risks weakening the industry's willingness to promote and advance responsible-investment principles openly.
To this end, major institutional investors have opted to follow Stephen Covey's advice and "keep the main thing the main thing". As highlighted by Larry Fink in his 2022 letter to CEOs, asset managers, as fiduciaries of their clients, have a duty to focus on driving durable long-term returns and helping them reach their financial goals. While institutions have responded differently to the politicisation of ESG, the fiduciary rationale for considering financially material sustainability factors remains intact: such factors may affect long-term risk, earnings durability and client outcomes.
From past performance to protecting future outcomes
Critics of sustainable and ESG investing argue that there has been no discernible performance advantage relative to traditional strategies, with some ESG-labelled strategies underperforming. However, the distinction has become less clear-cut as ESG ratings and analysis have increasingly been incorporated into mainstream investment processes. It is also important to consider recent market dynamics and how they could have contributed to the underperformance of ESG-labelled strategies relative to the market. Strong share price performances from energy and defence companies (usually carried at very low levels in ESG-labelled strategies) played a role, along with much lower exposure to some of the largest AI-related technology stocks in ESG-labelled strategies.
A recent study by Giese and Shah (2025) confirms that higher-ESG-rated companies showed better long-term earnings growth and lower earnings variability. While recent market dynamics may not have been supportive of market-beating performances for all such companies - the evidence suggests that stronger management of material ESG risks can contribute to more resilient earnings and lower company-specific risks over longer periods.
Staying the course
The ESG conversation has not changed because ESG factors have stopped mattering. It has changed because investors have become more discerning about which sustainability issues are financially material and whether corporate commitments are supported by demonstrable action.
While ESG-labelled products may move in and out of favour and political language may continue to evolve, the underlying investment questions remain the same: How well is a company governed? Is its business model resilient? Is management allocating capital effectively? And are a company's actions consistent with its stated commitments?
Investors are increasingly demanding less rhetoric and more evidence. Companies will be judged not simply on the volume of their sustainability disclosures, but on the credibility, relevance and materiality of the information they provide. The same scrutiny is likely to extend to asset managers, ratings agencies and other service providers.
Ultimately, ESG is most useful not as a label, but as part of rigorous fundamental analysis. It does not replace valuation, competitive analysis or financial assessment. Rather, it broadens that analysis by highlighting risks and opportunities that may affect earnings durability, business resilience and long-term value creation. The terminology and use-case may continue to evolve, but the underlying discipline is likely to remain.
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