Rise of Sustainable Investing ESG Factors Are Reshaping Global Finance

Investing with sustainability, which takes into account environmental, social and governance (ESG) factors along with financial performance, has shifted from being a niche practice to becoming a standard practice in the global financial system. By 2024, assets managed on ESG basis were $40. 3 trillion globally, which is more than one-third of the total professionally managed assets.

This change is being supported by several forces that include; Climate change risks, Consumer behavior shifts, and Compliance mandates. Sustainability has become an essential part of the investment process for big investors like BlackRock and Vanguard, and governments are enacting sustainable finance policies.

It is affecting all the sectors of the economy. It is now becoming evident that the companies with good environmental, social, and governance (ESG) scores are being offered better terms and premiums in the market. For instance, a study conducted by MSCI showed that the firms with good ESG scores had better performance than firms with poor scores by 2. The demand is expected to rise at a CAGR of 6% per annum between the years 2007 and 2024.

But the growth of the ESG investing has also come with some problems. The problem of ‘greenwashing’ which is when a company or a fund overemphasizes its commitment to the environment has raised the need for standardised ESG reporting frameworks. To this end, the regulators such as the SEC in the U. S. and the EU’s Sustainable Finance Disclosure Regulation (SFDR) are enhancing disclosure standards.

Sustainable investing is also contributing to the development of new financial products. A record volume of green bonds, which are used to finance environmentally sustainable projects, was $517bn in 2024. At the same time, Sustainability-Linked Loans (SLLs) – loans whose interest rates are linked to sustainability/ESG performance – more than doubled to $655 billion.

Sustainable investing is becoming more popular and it can be seen that ESG factors will become even more important in the future of investment. Those companies and investors that do not change and embrace this new reality are likely to become obsolete in an economy that is now beginning to factor in environmental impact as much as it does financial returns.