Following the explosive growth over the 10 years leading up to 2022, sustainable investing in public markets, in all its forms, has been forced to retrench as poor investment performance, accusations of greenwashing and shifting political winds have dogged the sector.
In 2025 alone, sustainable funds experienced $86bn (£64bn) of net outflows while 436 sustainable funds in Europe were closed, according to Morningstar.
Because of this backdrop, the past three years have been a time of reflection and consolidation for sustainable managers and those without a genuine approach to sustainability have withdrawn from the market.
To support the evolution of sustainable investing, we believe there are five core elements to keep in mind. I’ve outlined these below.
Stamp out greenwashing
First, we need to address the greenwashing scandal that characterised many aspects of the early years of sustainability investing.
Consolidation in the sustainability sector and tighter regulation have already helped drive out many of the green-washers. But sustainable asset managers need to do more. They should ensure that minimum sustainable thresholds are set and agreed upon with investors and that the sustainability scores for individual investments are open to scrutiny. This avoids a company making claims which can’t be backed up by data.
Our investors tell us that these high thresholds are what’s needed for the market to move forward; that this is a key differentiator of our approach.
See also: Sustainable investing: Green shoots and leaves
Most importantly, sustainability should be measured in relation to its materiality on the financial performance of a business to ensure that assessments of the financial and sustainable qualities of an investment converge rather than exist in parallel universes.
Make sustainability client‑led
What is then needed is the recognition that sustainability can come in many different flavours and sizes – but within a framework of authenticity. Sustainable investors are more sophisticated than ever before and want to deal with managers who can cater to a variety of needs and understand that a one-size-fits-all solution does not work.
Asset managers need to offer solutions, not impose their own views. They need to become more consultative in their approach, working with clients to understand their sustainability objectives and modelling the investment risk and return implications of those objectives. Investors need to set the sustainability criteria for their money, not the asset managers.
The upshot of this is that we will see more segregated mandates with client-specific sustainability criteria driving the structure and performance of sustainable portfolios.
Understand real risk trade‑offs
There should also be a more open conversation about the interplay of sustainability and investment risk management. Employing a sustainable approach to investing in public equities has significant implications on the size of the universe of stocks that can be invested in and therefore on the risk of the portfolio relative to a broad equity index or benchmark.
Take a look at one of the common benchmarks used by global sustainable equity investors, the MSCI All Country World Index, and you see that this is comprised of over 2,500 individual listed companies. But once you include only those companies which are sustainable, the number falls sharply.
Ambienta’s own analysis suggests that only 900 of these companies would meet our minimum sustainability criteria. This excludes almost entire sectors like energy, real estate, consumer staples and communications services.
See also: Biodiversity: A theme of growing importance and investment opportunity
For sustainable investing in public markets to evolve, these risks need to be modelled, and investors need to understand the implications of their sustainable choices. This isn’t about investing in a simple global equity index.
Long‑term trends and short‑term risk
It’s worth remembering that for sustainable investing to succeed, it must combine a commitment to long-term sustainable investment themes with the need for shorter-term investment performance.
Sustainable investing focuses on capturing some of the most significant investment opportunities and mitigating some of the most significant risks over the next 30 years. These sustainability risks are increasing, not diminishing. While a lot of investors do have this long-term view, 30 years is a very long time, and markets will focus on other drivers of return in the short and medium term.
Sustainable fund managers need to combine thematic investing with a strong discipline around factor exposures to keep ‘in the game’ in the short term. For example, this might involve adding to stock positions which display strong earnings and revenue growth when the market is rewarding this particular factor.
Fund managers and investors also need to get better at explaining the causes of performance dispersion from the broader equity indices which normally make up the portfolio’s benchmark.
Some of these will be external to the fund manager – caused by the sustainability framework that has been employed. An example of this would be the substantial underperformance of most, if not all, global sustainable equity investors in 2024 and 2025 caused by the concentration of equity returns in the magnificent seven stocks, and latterly the large AI stocks, which, by and large, do not fit with a sustainable investing approach.
On the other hand, investment managers should be judged on the elements which are very much in their control such as factor exposures, country exposures and stock selection.
In short, the attribution of relative performance between elements inside and outside the control of the manager is critical to grasp.
Ultimately sustainability is a driver of long-term investment returns. However, in the short term, investing through a sustainability lens delivers improves risk management because it addresses environmental challenges faced by all companies.
Redefine stewardship through deep, active ownership
Finally, the next era of sustainable investing needs to offer a fresh and committed approach to stewardship.
In the past, the focus of investment managers has been the number of engagements and the extent of voting against the recommendations of company boards. A sustainability approach needs to focus on the depth, rather than breadth, of engagement.
Managers should set action plans for engagement to improve sustainability issues in their portfolio companies. Public equity investors can learn from the successes of private equity sustainable investors where engagement has been an important element of the investor-investee relationship.
Investors, and particularly smaller ones, should collaborate with other investors to bring about change in portfolio companies and should be prepared to communicate their voting decisions to investee company management in order to elicit responses and action.
The days of simply reporting how investment managers vote are over. Success will come from active involvement in driving outcomes in a select number of companies.
See also: Have we reached peak anti-ESG?