Executive Summary
ESG investing is the answer to a double tragedy. Global systemic risks such as climate change are particularly challenging to address because they embody two intertwined dilemmas: a tragedy of the commons and a tragedy of the horizon. ESG investing has emerged as a mechanism for bridging the gap between short-term pressures and these long-term sustainability imperatives.
A bet on change. ESG metrics as a risk and analytical tool provide an essential lens through which to navigate the investment landscape, focusing on avoiding idiosyncratic risks today while anticipating long-term systemic risks and opportunities tomorrow. Rather than assuming a continuation of the status quo, they enable investors and institutions to manage change and drive innovation.
Moving from hype to mainstream. Investor attitudes towards sustainable investing have evolved from early hype to more sober resilience, reflecting the classic Gartner Hype Cycle framework. Indeed, the performance of ESG investments has been quite volatile over the past 15 years, mostly for the same reasons as non-ESG portfolios. But overall, ESG funds have proven resilient, continuing to see inflows and sustained growth. This shift towards more stable assets shows that sustainable investing has matured, not disappeared.
Europe dominates ESG investing. The extent to which ESG investing is prominent in portfolios varies widely by region. Europe is by far the leader – supportive regulations and strong investor demand have driven sustainable investing into the mainstream. European funds have a much higher proportion of ESG assets as a percentage of total assets under management than any other region – around a fifth, compared with low single-digit percentages in the US or emerging markets.
ESG investing is intelligent risk management. Beyond regional differences, a growing number of investors share a common motivation: they continue to view ESG considerations as a form of prudent risk management that offers strategic foresight. ESG does not guarantee success. But it does provide investors with a structural toolkit to seek, identify and analyze risks and opportunities beyond what can be deduced strictly from quarterly reports.
A complement to traditional financial analysis. Analysis that incorporates ESG considerations works best as a complement – not a substitute – for traditional financial analysis. The metrics are designed to complement, not replace, fundamentals such as earnings and cash flow. They can highlight risks or opportunities that a pure numbers view might miss. Used properly, they can lead to smarter strategic decisions while preserving core financial fundamentals.
A fiduciary duty. Investors' fiduciary duty is increasingly intertwined with prudent ESG-based risk management. By incorporating ESG factors, asset owners and managers are constantly rethinking how they can continue to thrive in an era that looks increasingly different from the past. This refines their pursuit of long-term returns and forces them to balance client demand for ESG with their fiduciary duty, recognizing that ignoring material ESG factors may itself mean failing their clients.
ESG investing matters for insurance. The insurance sector offers a powerful case study of why ESG cannot be ignored. As climate disasters intensify, insurers face rising claims: 2024 was the fifth consecutive year that insured costs from natural catastrophes worldwide exceeded USD100bn. Major insurers, particularly in Europe, have responded by committing to net-zero targets for both their underwriting and investment portfolios to reduce long-term risks. Such forward-looking moves are not just about keeping losses manageable; they also build valuable intangibles such as brand reputation, intellectual property and stakeholder trust.