Over the last couple of years, environmental, social, and governance (ESG) investing has emerged as one of the fastest-growing segments in global finance. ESG investing saw a major surge in 2020, especially in the previous quarter, when it attracted US$152 billion in new investments and reached US$1.6 trillion in assets. A record 196 new ESG products were launched as asset managers introduced or reshaped funds to align with sustainability principles. Growing investor interest and the impact of the pandemic further accelerated the shift to a greener, more resilient future. 

The Pullback from ESG Investments

However, this momentum began to fade after Russia’s 2022 invasion of Ukraine, as energy security concerns took precedence over climate goals, reviving interest in coal, gas and nuclear. Additionally, growing regulations in Europe and a political backlash in the US (where some states restricted ESG use in public investments) slowed down the ESG momentum.

The last quarter of 2023 marked the first global net outflows from sustainable funds on record. Recent months have left investors sceptical about ESG investing due to political opposition (especially in the US), stringent and often inconsistent ESG standards in Europe, and investor concerns over greenwashing. In the first quarter of 2025, global sustainable funds saw record net outflows of US$8.6 billion (bn). European investors, the doyens of sustainability investing, were net sellers for the first time on record in data going back to 2018, withdrawing US$1.2bn in ESG investments. A similar trend was seen in Asian markets.

Is ESG Investing a Fad or a Market Correction?

This raises the question: is ESG investing a short-lived phenomenon or a cyclical response to political and macro shifts? And if it is the former, what incentive remains for companies to invest in internal ESG reporting capabilities beyond regulatory compliance?

First, the bundling of E+S+G itself is a broad category. A more focused way to approach this question is to examine climate investing, arguably the most systemic and material component of ESG.

Climate Risk: Still Material for Long-Term Investors

At the core of any investment decision is a clear return generation or risk diversification motive. Hence, a better question is, does climate investing offer a competitive risk-adjusted return for investors? 

It seems that a perceived increase in regulatory and political uncertainty has reduced this risk-adjusted return for climate investing. But is this a lasting risk that changes the outlook for long-term investors? The answer is a big no. Studies by the Intergovernmental Panel on Climate Change (IPCC) and the Network for Greening the Financial System (NGFS) show that climate-related financial hazards, both physical and transitional, pose downside risks to global financial assets and gross domestic product.

The Case for Robust Climate Disclosures by Corporates

From an investor’s perspective, the ability to understand and price climate risk relies heavily on the quality of corporate disclosures. This is where robust climate reporting frameworks play a pivotal role, not just for compliance, but as enablers of capital allocation. According to a Robeco survey published last year, 62% of investors globally see climate change as a ‘significant’ or ‘central’ factor in their investment policy, with its importance expected to grow over the next two years as climate risks intensify.

Take, for example, the European Union’s European Sustainability Reporting Standards, especially E1_9 (comprising 44 metrics), which requires companies to disclose the financial effects of material physical and transition risks, and climate-related opportunities, including impacts on assets, revenues, and expected gains from mitigation or adaptation. 

This data enables investors to adjust valuation models (e.g. discounted cash flow) by incorporating climate-related risks (e.g. margin erosion, asset impairment) and opportunities (e.g. low-carbon revenue growth, cost savings), improving forecast accuracy and risk-adjusted return analysis. 

To produce reliable, audit-ready data, companies must invest in internal capabilities, including climate scenario modeling, geospatial risk analysis, emissions forecasting, and identifying transition levers. These efforts require cross-functional expertise, integrated systems and credible estimates.

The long-term investment case for climate remains strong and companies that invest early in building capabilities will be well-positioned to attract patient capital.