The Rise of sustainable investing: Strategies, trends, and future impact

ESG investing is now essential in portfolio management, shaped by regulations, sustainability demand, and political shifts

By Farah Mourad | 30 January 2025

ESG Investing 9 Jan-20250106-133353
  • Despite a 40% slowdown in ESG inflows in 2023, ESG assets are expected to exceed $53 trillion by 2025

  • Companies with strong ESG scores tend to be more resilient and outperform peers

  • ESG investment strategies include exclusionary screening, thematic investing, and impact investing

ESG (Environmental, Social, and Governance) investing has evolved beyond a niche strategy into a critical component of modern portfolio management. As global economies navigate increasing regulatory scrutiny, investor demand for sustainable growth, and shifting political landscapes, ESG principles are becoming integral to long-term financial success.

What is ESG Investing?

ESG (Environmental, Social, and Governance) investing is a financial approach that integrates sustainability and ethical considerations into investment decisions. It evaluates companies based on their environmental impact, social responsibility, and governance practices to identify opportunities that align with long-term growth and risk management.

ESG Investing Trends

Despite reaching a record $649 billion in inflows in 2021, ESG investments experienced a 40% slowdown in 2023, influenced by market volatility, political pushback, and changing regulatory requirements. However, ESG assets are projected to exceed $53 trillion by 2025, representing nearly one-third of global assets under management (AUM). Key trends shaping ESG investing include stricter regulatory requirements, increased corporate sustainability commitments, and the rising role of AI in ESG analysis.

Why Invest in ESG?

Investors are turning to ESG for both ethical and financial reasons. Companies with strong ESG scores tend to be more resilient, benefit from consumer trust, and are better positioned to adapt to regulatory changes. Studies show that firms prioritizing ESG outperform their peers in risk management and long-term value creation. Additionally, global initiatives on sustainability, such as the Paris Agreement and Net-Zero pledges, reinforce ESG as a central investment theme.

ESG Criteria for Investment

To determine ESG compliance, companies are assessed based on:

  • Environmental Factors – Carbon footprint, resource efficiency, pollution control, and climate resilience.
  • Social Factors – Employee treatment, diversity and inclusion, supply chain ethics, and community engagement.
  • Governance Factors – Leadership transparency, executive compensation, shareholder rights, and anti-corruption policies.

These criteria help investors screen for companies that align with sustainable and responsible business practices.

The ESG Investment Process

Investors looking to integrate ESG into their portfolios follow a structured approach:

  1. Exclusionary Screening – Avoiding industries with negative ESG impacts, such as fossil fuels or unethical labor practices.
  2. Positive Screening – Selecting companies that lead in ESG best practices.
  3. Thematic Investing – Focusing on specific ESG-driven industries like renewable energy or sustainable agriculture.
  4. Active Ownership & Engagement – Using shareholder influence to drive corporate ESG improvements.
  5. ESG ETFs & Mutual Funds – Investing in diversified funds that track ESG-focused companies.

ESG Investment Strategies

Several strategies help investors maximize returns while ensuring ESG compliance:

  • Best-in-Class Selection – Investing in top ESG performers within each sector.
  • Impact Investing – Targeting investments that generate measurable social or environmental impact alongside financial returns.
  • Sustainable Indexing – Tracking ESG-weighted indices to diversify exposure.
  • Regulatory-Aligned Investing – Adjusting portfolios to comply with evolving global ESG regulations.

Political and Regulatory Influences on ESG

Governments worldwide are tightening ESG disclosure requirements. The European Union's Corporate Sustainability Reporting Directive (CSRD) and the U.S. SEC’s climate risk disclosure rules are pushing companies toward greater transparency. However, political opposition in some markets, particularly in the U.S., has led to slower adoption of ESG funds. Institutional investors, however, continue to advocate for greater transparency, standardized ESG metrics, and more accountability in corporate governance.

The Future of ESG Investing

As regulatory frameworks evolve and sustainability becomes a core business priority, ESG investing is set to become a defining force in global markets. The increased use of AI in ESG analytics, rising consumer demand for corporate responsibility, and government incentives for sustainability will further accelerate ESG adoption. Investors who position themselves strategically in ESG-focused sectors will not only contribute to a more sustainable future but also benefit from long-term financial resilience and growth