Ongoing media coverage of greenwashing has generated a great deal of skepticism regarding sustainable, or impact investing. In its June special, the Economist proclaimed the acronym “ESG”, stood for ‘Exaggerated Superficial Guff’ and warned that three letters ‘won’t save the planet’. It went even further to say sustainable investing and ‘woke capitalism’ are duping investors into substandard returns. With the controversy running hot, it is perhaps a good moment to revisit the question, ‘Are risk-adjusted returns with a positive impact desirable and achievable?’ 

A changing context  
Over the last three decades, the context for capitalism has been shaped by a deep recognition of the interconnectivity between the biophysical, social & market systems. This systems view is built on global scientific consensus, social necessity, and economic reality. Notably, after the global financial crisis the Financial Stability Board (FSB) was established to assess both endogenous market risk (i.e. the risks that emanated from within the markets such as the sub-prime crisis) and exogenous market risk (i.e. risk that stems from outside the market system, such as climate change). The scale of climate risk resulted in the FSB overseeing the publication of the Task Force on Climate-Related  Financial Disclosures and called for climate stress-testing by central and large, systemically important banks . As the concept of exogenous risk has become more widely understood, market regulators have moved to encourage the market system to proactively address long-term risks to sustainable development. For example, the EU Green Economy Taxonomy  sets out which economic activities are aligned with low carbon, resource-efficient and socially inclusive outcomes. To increase alignment, the EU has adopted corporate sustainability reporting  standards (CSRD), disclosure standards for financial products’ sustainability attributes  (SFRD) and is ensuring through Mifid II that client sustainability preferences and risk are used as a basis for ensuring product suitability.