Financing a Greener Future: The Rise of Sustainable Investing

What would happen if the bottom line was no longer the top priority? Financial goals and sustainability do not need to be mutually exclusive – our changing planet requires a new approach to measuring returns.

Sustainable investing considers environmental, social, and governance (ESG) factors to determine which companies, industries and practices merit financial support.

Among the total global fund market, 27% of fund assets reported using some form of sustainable investing approach in 2024, according to an investment review from the Global Sustainable Investment Alliance (GSIA).¹ In 2018, only 3% of the fund market reported using any of these practices.

The future of finance is increasingly tied to the future of the planet. Read on to learn more about how sustainable investing works, its impact, and how individual investors can participate.

Key takeaways

• Sustainable investing considers the environmental, social, and governance (ESG) impact of companies and products to help influence investment decisions.
• There are different approaches to sustainable investing. Funds and investors can use screening methods to include or exclude investments based on certain criteria, or integrate ESG assessment into their investment lifecycle, for example.
• Individual investors can align their personal financial strategy with sustainability goals by exploring ESG funds, engaging in shareholder advocacy and committing to ongoing education.

What is sustainable investing?

Sustainable investing, sometimes referred to as ESG investing, refers to investing through a lens that considers environmental, social and governance factors as part of total returns.²

Alex Base, head tutor for CISL’s Sustainable Finance course, describes sustainable investing as comprising three goals. “[It’s] focused on delivering positive social and environmental impacts alongside financial returns, creating long-term value for businesses, society and the planet, and ensuring that outcomes are aligned to globally recognised frameworks.”

To determine which investments are sustainable, investors use established ESG frameworks to assess companies and funds. ESG factors are typically built around globally recognised standards, such as those related to human rights, labour and environmental protection.³ Examples of the components in each category include:

• Environmental: Pollution, climate change, emissions, biodiversity loss and waste management.
• Social: Labour standards, employee relations, diversity and inclusion, human rights and community impact.
• Governance: Management structure, executive compensation, audit committee composition, shareholder rights and anti-corruption policies.

How does sustainable investing work?

Sustainable investors value the broader impact on society alongside their financial goal. Similar to the concept of “voting with your wallet,” sustainable investing doesn’t just signal support for an outcome, it actively moves money towards achieving it.

Base explains that there are two primary ways this works. First, it’s “actively transitioning capital away from polluting, socially irresponsible businesses that are focused solely on short-term financial gain,” he said. Companies that engage in harmful environmental practices receive less funding and lower stock prices under a sustainable investment model.

In contrast, sustainable investors are also “providing capital to grow the new net-zero, nature positive, equitable, and just businesses,” Base added.

By directing capital towards companies that demonstrate strong ESG performance and away from those with poor records, sustainable investing aims to incentivise positive corporate behaviour. This continuous flow of investment supports ESG initiatives within companies and rewards those who are proactively mitigating environmental and social risks, ultimately helping to build more resilient and responsible businesses.

Sustainable investing does not come at the expense of profits, either. From 2014 to 2024, MSCI ESQ Equity leaders (companies with strong ESG scores) delivered higher returns compared to the overall MSCI Index, according to JP Morgan.⁴

There are a few different sustainable investing methods. Screening systems apply a rules-based approach to portfolio selection, while other strategies are focused on ongoing or trending themes.

Some examples of sustainable investment approaches include:⁵

In 2024, corporate engagement and stewardship was the most popular method, according to GSIR data. 89% of fund assets used this method, up from 27% in 2018. Norms-based screening grew in popularity during the same time period – from 27% of assets in 2018 to 63% in 2024.⁶

Other methods are less popular today. For example, positive screening declined from being used in 40% of fund assets to nearly half that six years later.

How can individual investors be sustainable?

Individual investors can leverage their portfolios to support a greener and more equitable economy. Aligning personal finance with a values history requires both self-education and proactive choices.

Here are some practical steps individuals can take to invest sustainably:

• Identify goals.

Prioritise the values you care about most and set clear financial goals for your investments.

• Explore ESG-focused funds.

The simplest way to begin is by choosing Exchange-Traded Funds (ETFs) or mutual funds that explicitly integrate ESG criteria. These funds employ the screening or integration methods mentioned above to ensure the underlying holdings meet sustainability standards.

• Utilize screening tools.

Use online tools and brokerage platforms to filter potential investments based on their own environmental and social priorities – for example, excluding companies involved in fossil fuels (negative screening) or prioritizing those focused on clean water technology (positive screening).

• Be aware of greenwashing.

Sometimes, companies try to reap the benefits of sustainable investment without making actual change, a marketing tactic called “greenwashing.” Avoid greenwashing by being skeptical of vague terms such as “eco-friendly” and searching for reputable certifications.

• Practice shareholder advocacy.

Exercising shareholder rights is a powerful form of corporate engagement. This can involve voting on proxy issues that push for ESG improvements, or even co-filing shareholder proposals on matters like climate risk disclosure.

• Ask your financial adviser.

Investors who work with financial professionals should explicitly discuss their interest in sustainable investing. Ask what ESG options are available and how the adviser evaluates a company’s non-financial performance alongside its traditional financial metrics.

The future of sustainable investing

“We need the finance sector to take responsibility for honestly and courageously driving the change required,” Base said. “We need brave leadership, as there is no justification to stick with a system that just simply doesn’t work for society or the planet.”

The rapid growth in the global sustainable investment market suggests that financial institutions and asset managers are increasingly accepting that ESG factors are critical for long-term value creation. The ongoing challenge is two-fold: ensuring the authenticity and rigour of ESG claims to combat “greenwashing,” and further integrating ESG into mainstream financial regulation and corporate reporting. As the market matures, sustainable investing is expected to evolve from an alternative approach to the new global standard for financial decision-making.

Courses and learning

GetSmarter collaborates with the world’s leading universities and institutions to design and deliver premium sustainability online short courses, including in sustainable finance and investment.

Guided by expert faculty, you can gain a practical understanding of today’s ESG criteria, and explore tactics for integrating these into your investment strategy. In the University of Cambridge Institute for Sustainability Leadership (CISL) Business Sustainability Management online short course, you’ll develop the skills to drive sustainable business in the green economy of tomorrow.

CAMBRIDGE CISL
Business Sustainability Management

Play your part in the transition to a greener economy.

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