ESG investing promised alignment between capital and sustainability. But in 2025, is it really delivering? This Insight explores where the promise fell short—and what must come next.
The rise of ESG (Environmental, Social, and Governance) investing was hailed as a potential tipping point—a way to align capital with climate goals, protect social value, and drive better corporate behaviour. A decade ago, hopes were high that financial markets could be a decisive lever in avoiding environmental collapse and achieving the Sustainable Development Goals.
But in 2025, that optimism seems now to be desperately misplaced. Despite trillions in ESG-labelled funds, the world remains completely off-track on virtually all major environmental indicators. The Stockholm Resilience Centre reports that six of nine planetary boundaries have already been exceeded (Richardson et al., 2023). Biodiversity loss, nitrogen pollution, and climate change are accelerating. Some leading ESG investors are scaling down their commitments and shifting priorities. If ESG investing is truly driving meaningful outcomes, the evidence is elusive . So, what went wrong—and is there hope for any course correction?
At its best, ESG investing encourages companies to internalise externalities—factoring in carbon emissions, social risks, and governance failures as material concerns. This has improved board oversight, encouraged more robust reporting, and in some sectors, accelerated decarbonisation.
Yet ESG has been undermined by several deep flaws:
Despite this, there have been some signs of progress. The Science Based Targets initiative (SBTi) has pushed hundreds of large companies to adopt verified decarbonisation pathways. The EU’s Corporate Sustainability Reporting Directive (CSRD) and the ISSB’s new IFRS sustainability standards offer a globalised push for clarity and rigour in disclosures. But all that good work faces being dragged down by calls for less bureaucracy, less cost to business and a slower pace of change.
In the financial sector, some investors have shifted from broad ESG screening to thematic and impact investing—backing clean energy, water infrastructure, and regenerative agriculture with a clear intention to drive real-world change. But this is still the minority.
Meanwhile, fossil fuel subsidies remain stubbornly high, biodiversity loss is accelerating, and the global temperature trajectory is still aligned with 2.7°C or more of warming (Climate Action Tracker, 2024).
Following the 2024 U.S. federal election, the political climate for ESG and sustainability has become significantly more hostile. The current administration has actively moved to dismantle or weaken regulations that supported corporate climate action, diversity and inclusion measures and ESG integration. High-profile rollbacks include the pausing or dilution of SEC climate disclosure rules, a renewed emphasis on fossil fuel development, and state-level campaigns attacking asset managers seen to prioritise environmental or social goals.
The effects are more than symbolic. A growing number of U.S. institutional investors are stepping back from ESG-labelled strategies, citing political risk and legal ambiguity. In January 2025, Blackrock became the latest major financial institution to withdraw from the Net Zero Asset Managers initiative. In some cases, funds have entirely rebranded or stripped sustainability language to avoid scrutiny. This backlash has also emboldened sceptics in other jurisdictions and introduced a chilling effect on global coordination.
In the short term, this shift threatens to stall progress on consistent disclosures, climate risk management, and fiduciary frameworks that incorporate sustainability factors. It also risks eroding investor confidence in the legitimacy and resilience of ESG strategies.
Longer term, the picture is mixed. Some observers believe that this political pressure may force ESG investing to become more rigorous, better defined, and more clearly connected to financial performance—ultimately making it stronger. Others warn that if major economies like the U.S. deprioritise environmental action at a federal level, the pace of transition globally will slow, and market-led approaches will lose momentum.
Either way, the direction of federal U.S. policy now clearly represents a headwind, not a tailwind, for ESG. This underscores the limits of voluntary corporate action and investor leadership in the absence of durable political commitment.
If ESG investing is to regain any credibility—and more importantly, have meaningful impact—then three things must happen:
In sum, ESG investing alone has not delivered the planetary impact many hoped for. But abandoning it would be the wrong lesson. Instead, we must demand more: not just better ratings or slicker reports, but more courageous alignment between capital, accountability, and the boundaries of our biosphere.
Richardson, K. et al. (2023). Earth beyond six of nine planetary boundaries. Science Advances. https://www.science.org/doi/10.1126/sciadv.adh2458
Berg, F., Kölbel, J., & Rigobon, R. (2022). Aggregate Confusion: The Divergence of ESG Ratings. Review of Finance, 26(6), 1315–1344.
Climate Action Tracker. (2024). Warming Projections Global Update – April 2024: Stronger 2030 targets needed to keep 1.5°C in reach. Climate Analytics & NewClimate Institute