Although sustainable investing has seen rapid growth over the past decade and remains an area of interest for many investors, its role in financial markets is shifting.
So, now we are in 2025, where does it stand today?
In recent years, ESG investing has come under scrutiny.
Some argue that it has not always delivered strong financial returns, while others suggest that it has been marketed in a way that overstates its impact. Concerns about “greenwashing” have led regulators to introduce stricter rules on how ESG investments are defined and reported.
While new regulations surrounding ESG criteria aim to improve transparency, they also increase compliance costs for companies. Meeting ESG standards often requires additional reporting, operational adjustments, and sustainability initiatives, all of which often add expenses. As a result, this can often make ESG investments a more expensive option compared to ‘traditional’ (non-ESG) options. Many ESG-centric companies do indeed perform well, though it can be more challenging to do this while managing these additional costs.
Another notable discussion around ESG investing and its relevance in business practices has been whether it creates unnecessary restrictions that could limit economic growth.
A common criticism of ESG investing is that it may not always deliver competitive returns compared to non-ESG investments, particularly for the cost. In some cases, ESG funds have greatly underperformed, whilst in other cases it has significantly outperformed.
Interestingly, as many investment funds today include a blend of assets, this often means they can have some exposure to ESG-focused companies or funds themselves. If you do not stay updated about in what your funds are investing, you may be exposed to ESG investments and not even know!
In some cases, investment funds may have their own selection criteria which excludes companies with unsustainable practices or will have a minimum percentage quota for sustainable companies. While this is far from a full commitment to ESG practices, it provides a degree of exposure while ensuring access to the entire investment universe, which can be enough for a lot of people.
Those who invest exclusively in ESG stocks may find their investment universe significantly limited, as the range of companies meeting increasingly strict ESG criteria is naturally smaller compared to the broader market.
In this sense, ESG investing is commonly finding greater relevance as part of a diversified approach rather than a full commitment, especially for investors who do not wish to be restricted in their investment choices.
For some of you reading this, ESG is your whole world, whilst for others, you want the best return whether that be ESG or not.
The real answer to this question, as it always has, lies in your own personal beliefs. Consider what you are setting out to achieve with your investments.
Are you looking to have a greater positive impact on the planet, or a greater investment selection aimed at enhancing returns?
ESG remains, and is likely to remain, relevant in the broad world of investments, but there are battles ahead. Only time will tell if ESG investments can continue to evolve and adapt to the market and retain its appeal to investors.
Please note that all information within this article has been prepared for informational purposes only. This article does not constitute financial, legal or tax advice.