How Shifting Financial Realities Are Re-Shaping Sustainable Investing

For more than a decade, Environmental, Social and Governance (ESG) investing has been one of the most discussed themes in global finance. It promised a way for investors to align their capital with responsible business practices while also improving long-term resilience. Yet in recent years, the question “Is ESG dead?” has appeared increasingly often in headlines and seminars.

In reality, ESG is not disappearing—but it is undergoing significant change. One of the least discussed but most influential factors behind this shift is the changing cost of capital. Interest rates have risen sharply compared with the previous decade, affecting development projects, corporate profitability and ultimately, the attractiveness of certain ESG-related investments.

Understanding these financial pressures helps explain why ESG is evolving—and why it still matters.

The Rise of ESG: A Quick Recap

ESG investing gained real momentum after the 2008 financial crisis, coinciding with a long period of extremely low interest rates. Capital was cheap, making it easier for companies to fund new development, take risks and invest in long-term sustainability projects. Investors, meanwhile, increasingly wanted their portfolios to reflect environmental and social priorities.

This combination—abundant liquidity and increasing demand—helped ESG expand rapidly into the mainstream.

The Backlash: Where Criticism Emerged

Although ESG became popular, several problems soon surfaced:

1. Inconsistent Standards

Different rating agencies could give the same company very different ESG scores, creating confusion.

2. Greenwashing

Some funds were given ESG-themed labels despite holding companies with limited sustainability credentials. Regulators have since stepped in, but reputational harm lingered.

3. Political Polarisation

ESG became a political flashpoint, particularly in the US, contributing to negative publicity worldwide.

4. Unrealistic Performance Expectations

Some investors assumed ESG funds would automatically outperform, which was never guaranteed.

These issues alone were enough to prompt a re-evaluation of the ESG landscape—but changing financial conditions have accelerated that reassessment.

How Higher Borrowing Costs Changed the ESG Landscape

The financial backdrop today looks very different from the one in which ESG flourished. After more than a decade of near-zero interest rates, borrowing costs have risen sharply. This shift affects sustainable investing in several ways.

1. Development Becomes More Expensive

Many ESG-related projects—such as renewable energy infrastructure, green building developments or energy-efficiency upgrades—require significant upfront capital investment. When interest rates were low, long payback periods were acceptable. Cheap finance made it easier for companies to justify large-scale, long-term sustainability projects.

Today:

• Debt is more expensive, increasing the cost of new development.
• Loan servicing costs are higher, reducing available cash for investment.
• Breakeven points have shifted, because projects now need higher revenue to offset financing costs.

This does not make ESG projects unviable—it simply means financial discipline and clear value propositions are more important.

2. Impact on Profitability

Companies with thin profit margins feel higher interest rates acutely. For them, ESG initiatives that were once considered attractive may now appear less urgent if they do not produce immediate financial benefit.

For example:

• A company may delay upgrading machinery to improve energy efficiency if the financing cost outweighs near-term savings.
• A property developer may scale back sustainable building features if they lengthen the payback period.
• Infrastructure projects—such as wind or solar farms—face higher capital costs, affecting their projected returns.

This has led to greater scrutiny of ESG-linked expenditures, especially when the financial reward is distant.

3. Investors Re-Assess Growth Expectations

Higher borrowing costs tend to favour established, profitable companies over early-stage or high-growth firms that rely heavily on borrowing. Many innovations in sustainability—such as battery storage, carbon-capture technologies and clean energy start-ups—fall into the high-growth category.

As interest rates rose:

• Valuations for some sustainability-focused firms declined.
• Growth expectations were revised.
• Investors sought shorter-term, more predictable returns.

For some commentators, these market movements looked like evidence that “ESG is dead”—but in reality, they simply reflected a normalisation of financial conditions.

So, Is ESG Really Dead?

No—but ESG as a single, catch-all label is certainly fading.

ESG Is Evolving Into More Precise Categories

Instead of discussing ESG as one broad concept, investors and fund managers now focus on specific themes:

• Climate transition strategies
• Renewable energy and infrastructure
• Stewardship and corporate engagement
• Impact investing
• Biodiversity restoration
• Social and labour practices

This thematic approach avoids vague or overly broad ESG labels and allows investors to match their objectives more clearly to outcomes.

Regulation Is Strengthening the Market

The UK’s Sustainability Disclosure Requirements (SDR) are being introduced to improve fund labelling and reduce greenwashing. Companies must also report more detail on climate-related risks.

These rules do not signal the end of ESG—they are designed to make the market more reliable and transparent.

Financial Materiality Still Matters

Even without the ESG label, many factors it captures remain financially relevant:

• Climate risks affect supply chains and insurance costs
• Governance failures still lead to fines and lost investor confidence
• Labour issues can disrupt operations and damage brand reputation

The recognition that these risks have financial consequences ensures ESG-type analysis retains value.

What This Means for Investors

Rather than abandoning ESG, investors are becoming more selective and more evidence-based.

1. Focus on Real Economics

Sustainability themes should be evaluated using the same financial principles as any other investment:

• What is the cost of capital?
• What is the realistic payback period?
• How sensitive is the project to changes in interest rates?
• What is the breakeven point?

These questions help distinguish strong opportunities from those reliant on conditions that no longer exist.

2. Look for Companies Adapting Successfully

Firms that can navigate higher financing costs and maintain sustainable practices often demonstrate strong governance and strategic clarity—qualities that long-term investors typically value.

3. Diversify Sustainable Exposure

There is no single “ESG fund.” Instead, investors can access sustainability across asset classes:

• Renewable energy
• Sustainable property
• Green bonds
• Circular economy businesses
• Low-carbon infrastructure

A diversified approach reduces reliance on any one sector or technology.

4. Align Values With Realistic Expectations

If a client wishes to prioritise sustainability, this can still be achieved—provided the financial trade-offs are understood and aligned with overall objectives.

Conclusion: A More Mature Phase for ESG

ESG is not dead. It is entering a more disciplined, financially grounded phase. Higher borrowing costs have changed the economics of development projects and shifted profitability assumptions, leading to greater scrutiny of ESG-related initiatives. But they have not removed the underlying need for companies to manage environmental risks, treat stakeholders responsibly and govern themselves effectively.

Rather than signalling the end of ESG, the current environment marks its evolution—from a broad marketing term to a measured, data-driven part of financial analysis.