Once one of the financial industry’s boldest growth areas, environmental, social and governance investing has become a flashpoint of regulatory scrutiny and ideological debate. The story of ESG, however, isn’t one of failure but rather one of evolution, a maturing concept being recalibrated for a more complex, more informed investment landscape—a rebranding of sorts.
After gaining momentum as a means for investors to align their financial goals with their personal values by focusing on socially responsible investing, and the COVID-19 pandemic further turbocharging the trend, ESG investing began to face pushback.
The Great ESG Backlash
The backlash didn’t happen overnight. It was a perfect storm of political opportunism, market timing and legitimate concerns about overpromising.
Texas two-step: When Texas Comptroller Glenn Hegar published a list of financial firms allegedly “boycotting” fossil fuels, it wasn’t just political theater but a $19 billion warning shot. Suddenly, ESG wasn’t just about returns but about whether you could do business in America’s second largest state.
Performance problem: The year 2023 was brutal for many ESG funds. Rising interest rates hammered growth stocks (including many clean tech darlings), while oil and gas companies, often excluded from ESG portfolios, soared. Critics pounced: “See? ESG is just virtue signaling that costs you money.”
Greenwashing epidemic: As regulators dug deeper, they found funds labeled “sustainable” that owned tobacco companies, weapons manufacturers and fossil fuel giants. The Securities and Exchange Commission started wielding the regulatory equivalent of a truth serum.
Market Underperformance
While ESG underperformance was a function of sector and style exposure, not the framework itself, it fueled criticism. Investors began asking whether ESG was truly additive or just another “factor bet” with unpredictable payoff.
ESG’s Resurrection
While politicians were busy turning ESG into a culture war battlefield, behind the scenes, these funds’ assets continued to rise despite the flow of funds slowing down. Smart investors stopped using the toxic three-letter acronym but kept analyzing climate risks, supply chain vulnerabilities and corporate governance. They just called it “risk management.”
As a result, despite political headwinds, private equity investment in clean energy is projected to grow from $463 billion in 2024 to over $560 billion by 2030, according to Pitchbook News. Electric vehicle adoption continues its relentless march upward. Solar and wind are now the cheapest forms of electricity in most markets.
While retail investors got spooked by the political noise, pension funds, sovereign wealth funds and family offices quietly continued integrating ESG factors. They just stopped talking about it at cocktail parties.
*This article is an abbreviated summary of “Beyond the Hype: The Rise, Reckoning and Future of ESG Investing,” which appears in the September 2025 issue of Trusts & Estates.
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