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1. Sustainable investing wasn’t the goldmine it seemed

As early as 2004, the UN published the Who Cares, Wins report, compiled by a broad group of experts. The report introduced the ESG (Environmental, Social, and Governance) framework, which has since become widely adopted in the financial sector. ESG refers to the consideration of environmental, social, and governance factors when assessing risks and opportunities related to companies.

ESG investing gained real momentum around 2017, fueled by growing concerns about climate change. The influx of new money largely went into sustainable funds, and institutional investors also started integrating ESG into their investment strategies. For a few years, ESG-focused investments performed exceptionally well.

However, interest began to wane as early as 2021, and stock prices followed suit. Several factors contributed to this decline. Financial research has shown that ESG funds’ excess returns were primarily driven by the influx of new money—something that went unnoticed during the initial boom. Asset management giant BlackRock has even faced lawsuits for allegedly painting an overly optimistic picture of responsible investing’s environmental impact. The politicization of sustainability has also deterred some investors. Additionally, ESG funds traditionally exclude defense industry stocks, which saw a significant rise following Russia’s invasion of Ukraine.

3. Investors should focus on making "brown" companies greener

Solving the climate crisis is one of humanity’s most pressing challenges. As an investor, I would focus on the "E" in ESG—environmental factors.

If an investor wants to play a role in solving the climate crisis, they should invest in brown companies and, in return, demand changes that reduce their carbon emissions and other environmental impacts.

While individual investors' money may not make a big difference, a large group of individuals investing in a fund that operates on this principle can give fund managers leverage. A fund manager could tell a company’s leadership: "Here’s capital for you, but to receive it, you must reduce emissions by a certain percentage within a specific timeframe." Such funds are still rare, but I hope they become more common.

Banks should also adopt a similar approach. Today, many banks classify industries like agriculture as polluting and therefore refuse to lend to them. Does this make agriculture greener? Or should we actually support its transition in every possible way?

4. Approach ESG ratings with caution

As sustainable investing gained momentum, evaluating sustainability itself became a business. Today, there are countless firms around the world that assess ESG performance, and nearly every sizable company now publishes a corporate responsibility report.

Despite—or perhaps because of—these ratings and reports, identifying a truly responsible company or fund remains challenging. Take tobacco giant Philip Morris, for example. Its 109-page sustainability report from 2023 is so convincing that the company was included in the Dow Jones Sustainability Index. In the report, Philip Morris highlights its commitment to responsible product development, which eliminates the need for tobacco farming and prevents deforestation. In practice, this means shifting to e-cigarettes. From an environmental perspective, this may be a step in the right direction—but does it make the company responsible?

There are no universal standards for ESG assessments. Research has also shown that companies performing well in the stock market have had their ESG ratings adjusted retroactively to appear more favorable.

5. The financial sector shouldn’t define responsibility

Decades ago, an archbishop asked me for advice on ethical investing at a seminar for the Church Pension Fund. I told him I should be the one asking him for guidance—and I still feel the same way.

The financial industry has taken it upon itself to define responsibility, but I believe that task belongs to others, especially policymakers. It’s up to companies to comply with the laws and international regulations that are set.

I originally planned to publish this as a book. But then I realized this is the most important paper of my career—one that I want anyone interested to be able to read. Change won’t happen quickly because there is a massive amount of money in the ESG market, and very few people are willing to admit that the idea didn’t work as intended. The industry won’t make noise about it, which is why we researchers must speak up.

Vesa Puttonen has compiled numerous examples and additional information on the  website.

Puttonen’s white paper Sustainable Investing in Theory and Practice: The Ultimate Solution is available for free download .