ESG investing isn’t dead. Sustainable investment still matters for long-term returns despite backlash and fund outflows.
The backlash against ESG labels explained
In an era of war, oil shortages and “anti-woke capitalism,” record outflows from ESG-labelled funds are unsurprising. JPMorgan and Goldman Sachs – the two largest global investment banks – have left net-zero alliances, European funds have softened rules around defence investing, and hundreds of other funds have dropped ESG from their branding.
Yet while the label may be fading, the practice is not. ESG has become politically charged, but the discipline of assessing long-term value continues. Most individual investors still express interest in sustainable investment, and 48 of the world’s 50 largest asset managers still use ESG data. The question of what a company is worth over time is not going away and ESG information will always have a role to play here.
READ MORE
How ESG investing gained momentum
The ESG label gained momentum in the early 2000s as sustainability shifted from “doing the right thing” to a financial case for managing long-term business risk and performance.
After the 2008 financial crisis, investors sought lower fees and lower risk, helping passive funds overtake active funds by late 2019. That gave the big three index managers, BlackRock, Vanguard and State Street, roughly a quarter of S&P 500 voting power. Because index funds cannot simply sell underperforming or problematic companies, they relied more on stewardship. ESG frameworks gave them a structured way to assess governance, identify non-financial risks and engage with boards.
From 2019 to 2021, ESG adoption accelerated as customer demand, investor appetite and interest in measurable impact grew. By then, ESG assets represented roughly a quarter of professionally managed assets worldwide.
Why market conditions changed the narrative
For a time, the trade-off looked easy: clean energy stocks rose while fossil fuel stocks underperformed, climate and financial risks appeared aligned, and stronger workforce practices could be linked to lower turnover and better long-term performance.
That backdrop did not last. Covid-era inflation triggered a sharp rate-hiking cycle, war lifted defence stocks, and energy shortages boosted fossil fuel prices. Investors did not abandon their values so much as reprice them.
ESG’s fall from grace was largely the story of a label being weaponised. In the United States, attacks on “woke capitalism,” red-state boycotts, legal pressure on net-zero alliances and Trump administration executive orders turned ESG into a symbol of ideological overreach. The backlash spread to Europe, where over 600 funds were renamed in a single quarter in 2025 and nearly 400 dropped ESG-related terms ahead of new anti-greenwashing rules. Managers were not necessarily abandoning sustainability analysis; they were avoiding a contested label.
Why ESG factors still matter in investment funds
Strip away the label and what remains are investment considerations that still matter. Environmental, social and governance factors affect earnings durability and hence expected returns.
Governance is the clearest example. Weak oversight, poor incentives, excessive leverage or entrenched audit relationships can destroy capital by undermining the reliability of earnings, the quality of risk management and the discipline of capital allocation.
Environmental and social factors work in the same practical way. Higher-emission companies can face transition risk such as potentially stranded assets, and future regulation, which affects valuations and cost of capital. Social factors matter where workforce practices, customer trust, supply-chain standards or community relationships influence productivity, reputation, litigation risk and the licence to operate. ESG does not need to be a separate asset class or moral overlay; it is part of assessing whether profits are sustainable and whether today’s valuation reflects future risks and opportunities.
The structural flaw behind ESG criticism
The backlash against ESG was not incidental. In large part, it reflected a structural weakness in the way ESG was defined, marketed and measured. Unlike real estate, equities or fixed income, ESG was never a clearly agreed upon asset class. What counts as a material ESG risk is often subjective and varies significantly by company, sector and geography.
That ambiguity became more problematic once a dedicated ratings industry developed around it. Companies learned that strong disclosure could be rewarded even where underlying performance was weaker. Meanwhile, ratings providers, working with vast datasets and different methodologies, often reached sharply different conclusions about the same company.
ESG investing and long-term value
The result was both resentment and confusion. ESG had been elevated into something broader and more symbolic than the investment discipline it was meant to support. In the process, the label became easier to attack than the underlying practice.
The case for considering ESG factors does not need to be overstated or recast as a separate asset class. At its core, it is no different from assessing the likes of competitor dynamics, liquidity or leverage: it is part of understanding what could affect a company’s value over time.
What it is, and what it should remain, is a practical way to assess the long-term risks and opportunities that shape company value. The problem was never the discipline itself. What survives is the recognition that governance failures destroy capital, that climate risk has a cost of capital, and that understanding what a company is truly worth over time has always required looking further than the next quarter. That is not ESG. That is just investing.