Despite the political challenges, the market for ESG investing is growing and continues to be a crucial component of the global investment scene
The most recent version of ethical or sustainable investing, where investors seek returns without sacrificing their values, is ESG investing, which focuses on environmental, social, and governance (ESG) metrics. In addition to standard financial metrics, ESG takes into account a company's impact on the environment and society as well as operational issues like shareholder rights, diversity, executive compensation, and transparency over leadership choices.
ESG investment's rise and fall.
Due to massive clean energy subsidies and extremely low interest rates, which promoted investment in alternative assets, ESG investing reached its peak between 2020 and 2022 with a spike in fund launches and record asset flows. Additionally, Covid encouraged a reassessment of priorities and an increasing focus on sustainability and ethics. In 2021, investments in international ESG funds exceeded £645 billion.
When central banks started raising interest rates to contain inflation following the pandemic, the bubble burst. The impact of the wider flight to safety was exacerbated by speculative clean-energy projects becoming more costly and risky due to higher borrowing costs.
It was feared that ESG investing would follow in the footsteps of its predecessor, socially responsible investing (SRI), which emerged in the 1990s. As a result of this trend, investors began to prioritize growth stocks over defense, tobacco, and alcohol stocks, which were typically value and income stocks. SRI withered on the vine after the growth bubble burst. "What I call ESG 1.0 is really a resurrection of that SRI movement," Orbis Global Balanced fund manager Alec Cutler stated to Citywire in 2023.
The energy crisis following Russia's invasion of Ukraine in 2022 also halted the ESG boom, forcing many countries to prioritize energy security. This concern was further heightened by the Iranian conflict and a political and regulatory backlash in the US that extended to Europe. ESG has been called "woke capitalism" and dismissed.
To increase the country's production of fossil fuels, US President Donald Trump has announced more drilling. Additionally, he pulled the United States out of the Paris Climate Agreement for a second time and the UN Framework Convention on Climate Change. Many were dissatisfied with the lack of consensus at last year's COP30 climate-change conference in Brazil regarding the transition away from fossil fuels.
Tony Blair, the former prime minister, recently called on the government to abandon its net-zero goal and concentrate on North Sea oil and gas exploration in order to produce energy for artificial intelligence. Additionally, Trump has opposed diversity, equity, and inclusion initiatives, and major US corporations like Amazon, Disney, Google, and Meta have followed suit.
ESG investing's difficulties.
In light of this, a number of asset managers have reduced their commitments to ESG, and funds have removed the term from their names due to significant withdrawals. Despite having previously supported the investment strategy, Larry Fink, CEO of BlackRock, the largest asset manager in the world, declared in 2023 that he would no longer use the term, possibly sensing the shift in the sentiment surrounding ESG.
Another challenge was the ambiguity that ESG, like SRI, had always faced. Since ethics are personal, the term is subjective. ESG strategies typically support businesses that are producing renewable energy or give preference to capital-light businesses with low carbon footprints. This might entail focusing on businesses addressing climate change while excluding tobacco, fossil fuel, and defense companies.
However, because there isn't a single, accepted legal definition, ESG depends on varying interpretations of what constitutes sustainability and ethics. For example, one investor or ESG-focused fund may view defense as taboo, but another may view it as essential to social stability and national security, making it entirely acceptable. In a similar vein, some people view nuclear energy as expensive and hazardous because it generates radioactive waste. Others, however, see it as an essential source of low-carbon electricity and crucial to the energy transition.
Moreover, ESG components are subject to change. For example, social and environmental factors, like diversity, are now more important than governance, which used to be the main focus. Due to this subjectivity, rating agencies' assessments of a company's ESG attributes vary, and there may occasionally be inconsistent priorities and scores.
Concerns about businesses and funds "greenwashing" their environmental credentialsthat is, using marketing or advertising to make ambiguous, deceptive, or false claims about their operational impact on the environmenthave been raised by this. BlackRock, the largest asset manager in the world, was accused by environmental law charity ClientEarth in 2025 of calling its funds sustainable despite having invested more than £1 billion in fossil fuel companies like Shell and BP. Since then, BlackRock has adjusted a number of its funds.
According to a Hargreaves Lansdown survey, 75% of its clients believe it's critical that their investments reflect their values, with water security, cybersecurity, anti-corruption, and bribery being the main concerns. Compared to 28% of men, 47% of women said that responsible investingwhich includes ESG practices and businesses that have a "positive, measurable impact"is crucial.
Other asset managers have also been charged with mislabeling their funds, including UniSuper and Vanguard Investments Australia.
Since 2022, markets have shifted toward capital-intensive industries like oil and banks or AI. However, according to investment platform Morningstar, ESG funds are still in charge of £3.9 trillion in assets. According to Darius McDermott, managing director of online research center and fund ratings agency FundCalibre, "responsible investing may look like a busted flush, but the reality is more nuanced." Additionally, the atmosphere has altered. Responsible tactics have not performed well lately. However, decarbonizing our economy is still imperative."
The private sector is moving forward with investments, supporting the energy transition, despite political skepticism about renewable energy in the US. The Biden-era Inflation Reduction Act, which offers £369 billion in tax breaks and spending to promote clean energy and reduce greenhouse gas emissions, is still supported by a number of US Republican lawmakers. According to McDermott, "even if it is partially repealed, this won't necessarily affect the bottom line of all decarbonization companies."
Investment in renewable infrastructure could be accelerated by deregulation, such as modifications to the US planning framework, as happened during Trump's first term. However, sticky inflation and interest rates that might remain high for longer than anticipated are McDermott's "biggest concern" since they might discourage the significant capital investment required to decarbonize economies.
ESG investing reappears.
According to Dominic Rowles, head of ESG at retail investment platform Hargreaves Lansdown, "most mainstream fund managers integrate financially material environmental, social, and governance risks and opportunities into their investment processes," despite the fact that the excitement surrounding ESG investing has subsided. Thanks to a rebound in Europe, global sustainable funds saw a slight recovery in the first quarter of this year, with £3.5 billion in net inflows, according to Morningstar. However, the US experienced £4.3 billion in outflows for the fourteenth consecutive quarter. The head of Liontrust's sustainable investment team, Peter Michaelis, claims that ESG investing is "not a fad, nor do the reasons for it delivering good long-term returns fade". "The overarching themes of enhancing resilience, quality of life, and resource efficiency will endure, and businesses that provide them will grow rapidly."
A future source of demand.
Differences between generations also exist. A Morgan Stanley survey conducted in April 2025 found that Millennials (those born between 1981 and 1996) and Generation Z (19972012) were more likely than Generation X (19651980) and baby boomers (19461964) to be interested in sustainable investing. "Millennials' preferences matter, and studies show that they are willing to change their buying habits based on their views of a company's sustainability credentials," says Rowles. Millennials make up the largest living adult cohort.
Greenwashing is being addressed by regulators in the interim. Sustainability-related claims must be "fair, clear, and not misleading" according to the Financial Conduct Authority's (FCA) Sustainability Disclosure Requirements. The EU has implemented the EU Circular Economy Action Plan to encourage investment in green infrastructure and the Corporate Sustainability Reporting Directive, which requires 50,000 European businesses to disclose information on a wide range of ESG issues.
When choosing a sustainable fund, investors should look at holdings, exclusions, engagement policies, proxy voting records, ESG metrics, any third-party verification, and the consistency of the fund's investment approach rather than labels, according to Darius McDermott of FundCalibre.
He mentions the Janus Henderson UK Responsible Income Fund, which has a value of 623 million. It continues to be a desirable choice for investors looking for a sustainable yield in both senses of the word. The fund steers clear of industries that it believes are detrimental to society and the environment, including alcohol, animal testing, the production of weapons, fossil fuels, nuclear power, gambling, and tobacco. AstraZeneca, the London Stock Exchange Group, HSBC, National Grid, and Smith and Nephew are among its largest holdings.
"Long-term structural demand drives most ESG themes," McDermott continues. In light of increasing urbanization and global wealth, the Regnan Sustainable Water and Waste Fund aims to address the need for better waste management and water supply. Local operators, who are less vulnerable to tariffs and geopolitical disruption than multinationals, make up the majority of the 240 million global fund. Top holdings include the Brazilian water and waste management firm Cia Saneamento Basico Do Estado de Sao Paolo and the American plumbing and heating product manufacturer Watts Water Technologies.
According to Peter Michaelis of Liontrust, the problem over the past few years has been the concentration of market leadership in the mining, oil, defense, and AI hyperscalers industries, which Liontrust's Sustainable Future funds either completely avoid or are underweight in. "We have always preferred a multi-thematic approach that concentrates on topics like cybersecurity, renewable energy infrastructure, and healthcare innovation."
The market is maturing, despite political obstacles and the unlikely return of the peak days of ESG investment inflows. ESG continues to be a crucial component of the global investment landscape, showing more resilience than SRI.
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