Sustainable/Impact Investing] From ESG to Impact: The Evolution of Sustainable Finance

Executive Summary

Over the past few years, Environmental, Social, and Governance (ESG) investing has shifted from a niche concern to a mainstream mandate for investors. Yet by 2025, ESG faces a notable backlash and confusion, particularly in the United States, where the very acronym has become politically contentious.¹ In response, the sustainable finance field is evolving toward an impact-focused paradigm – emphasizing measurable environmental and social outcomes rather than just policies and ratings. We examine how sustainable finance is moving from ESG to impact, highlighting the reasons behind this shift, the regulatory and market developments accelerating it, and what it means for institutional investors.

Three key takeaways

1. From risk to results: ESG integration helped mainstream the idea that sustainability affects risk and return – 93% of asset owners now weigh ESG criteria.² But ESG investing primarily optimizes portfolios; it doesn’t automatically equate to real-world change. Impact investing flips the script by starting with the intention to create positive outcomes and measuring success by social/environmental benefits achieved, alongside financial performance.⁷
2. Impact goes mainstream: Once a niche, impact investing is now a $1.57 trillion market, embraced by the largest asset managers and owners. In the last five years, one leading private equity platform (TPG’s Rise funds) alone raised over $20 billion for impact deals.⁶ From BlackRock to KKR, nearly every major private-market investor has launched sustainability or impact strategies, driven by client demand and evidence that impact investments can deliver competitive returns.⁶

3. Accountability and standards are rising: The evolution from ESG to impact is underpinned by better data and stricter standards. Regulators are cracking down on greenwashing – the SEC in the U.S. and SFDR in Europe. Under SFDR, only Article 9 funds with explicit sustainable objectives qualify as “dark green,” and many downgraded rather than over-promise.⁵ Investors now demand transparent impact reporting – “show me the impact” – and funds that rigorously track outcomes are building trust, especially with younger generations.¹⁶

I. ESG’s Mainstream Rise and Backlash

Not long ago, companies and asset managers spoke confidently about ESG. Sustainability reports proliferated and virtually every major firm set climate targets. However, by 2025 that confidence has cracked: across industries, ESG is under pressure and the acronym itself has become politically fraught.¹ In the U.S., mentions of “ESG” in corporate filings peaked around 2023 and have started falling as some firms quietly drop the term from communications. Political rhetoric turned ESG into an “acrimony-laden” subject, prompting certain U.S. states and officials to push back on ESG investing as a “woke” agenda. The backlash is here – with some companies scaling back public sustainability talk – even as their internal sustainability work continues.

Importantly, this backlash is about labels more than substance. Investors still care about climate and social risks, and global climate events (from wildfires to floods) haven’t abated. In Europe and much of Asia, ESG integration remains robust despite U.S. politics. In fact, Europe leads the world in sustainable investing: an estimated €6.6 trillion in EU assets were managed with ESG goals in 2024 (about 38% of all EU AUM).² By one analysis, 87% of global sustainable fund assets are domiciled in Europe³, reflecting the region’s strong regulatory push and investor demand. While U.S. sustainable funds saw net outflows in early 2024, European funds attracted billions in new inflows, underscoring divergent regional attitudes.³

The backlash has revealed confusion in the market over what ESG truly signifies. One issue is the inconsistency of ESG ratings and definitions. Different ratings agencies often score the same company very differently, leading to “aggregate confusion” for investors. Major providers use disparate methodologies, and regulators have taken notice – ESG rating providers came under intense scrutiny in 2023 as lawmakers explored ways to rein in their influence.⁴ High-profile controversies (e.g. the exclusion of a prominent electric vehicle company from an ESG index due to governance issues) fueled debate over whether ESG ratings reflect real-world impact or just internal corporate policies. In short, ESG as a concept became muddled – a mix of risk management metrics, ethical screens, and marketing, which sometimes obscured actual sustainability outcomes.

II. From ESG Integration to Measurable Impact

Facing these challenges, the sustainable finance movement is increasingly shifting focus from ESG inputs to impact outcomes. This evolution means moving beyond using ESG scores and policies as ends in themselves, toward measuring the tangible social and environmental results of investments. In practice, ESG integration has largely been about incorporating material sustainability risks into financial analysis (to protect enterprise value). Impact finance, by contrast, seeks to actively direct capital to solutions that produce a positive, measurable change in the world alongside financial return.

The push toward impact is driven by both criticism and opportunity. On one hand, regulators and stakeholders demand more accountability and transparency. The European Union’s Sustainable Finance Disclosure Regulation (SFDR), for example, now requires fund managers to classify products by sustainability ambition. Only “Article 9” funds are true impact-focused funds (with a defined sustainable investment objective), and they remain rare – accounting for just ~2.9% of EU fund assets in early 2024.⁵ This highlights that truly impact-driven funds are still a small minority, even as “light green” ESG funds (Article 8) proliferate. However, growing regulatory scrutiny of greenwashing and vague claims is pressuring the industry to back up sustainability promises with data. The EU is already reviewing SFDR rules to tighten definitions after criticism of greenwashing and inconsistent fund categorizations.⁵

On the other hand, investors themselves are increasingly seeking strategies that deliver demonstrable impact. Surveys show that a significant share of investors now prioritize impact investing and sustainability-themed investing – in one 2024 study, 36% of global investors planned to increase allocations to these strategies.⁶ Industry trends reflect this appetite: the Global Impact Investing Network (GIIN) estimates the worldwide impact investing market in the hundreds of billions of dollars and growing annually. In the U.S., despite political headwinds, 58% of asset managers see rising interest in impact investing opportunities.⁶ Simply put, clients (especially younger generations and institutions like pension funds) are pushing for investments that prove their positive effect on society or the environment, not just those that avoid harm.

Crucially, academics and thought leaders argue that focusing on impact will improve financial outcomes as well. By internalizing externalities – accounting for the costs companies impose on the environment and society – investors can make better decisions. A 2024 research paper suggests integrating externality data (e.g. carbon emissions, social impacts) into portfolio analysis could significantly reshape modern portfolio theory and redefine “materiality” in finance.⁷ In other words, what gets measured gets managed: if investors measure a portfolio’s real-world impacts, they can manage risks and returns with a more holistic view, potentially leading to more sustainable long-term performance. This line of thought is influencing new frameworks like impact-weighted accounting, which attempts to translate environmental and social impacts into monetary terms on financial statements.

III. Market and Regulatory Developments Accelerating the Shift

Several developments between 2023 and 2025 have accelerated the move from ESG to impact:

• Global Reporting Standards: In June 2023, the International Sustainability Standards Board (ISSB) issued its inaugural global sustainability disclosure standards (IFRS S1 and S2) to guide companies on reporting climate and sustainability risks in a consistent, investor-grade manner. These standards, along with the EU’s Corporate Sustainability Reporting Directive (CSRD), push companies to disclose not just policies but performance on key metrics (like emissions, resource use, diversity, etc.). Such disclosures lay the groundwork for investors to compare and reward actual impact performance across firms. Though the U.S. SEC delayed its climate disclosure rule under political pressure, many large U.S. companies are voluntarily aligning with global norms due to investor expectations.
• European Leadership: As noted, Europe’s regulatory environment (SFDR, EU Taxonomy, CSRD) effectively mandates an impact-oriented approach. Asset managers are adjusting: many funds that couldn’t substantiate a sustainability objective downgraded from Article 9 to Article 8 in 2022–2023, causing a stir in the industry. Now, those remaining in Article 9 or aspiring to it are compelled to clearly define how they deliver positive outcomes (e.g. specific carbon reduction targets, social project financing) and report on progress. This has spurred innovation in impact measurement tools, as firms seek to quantify outcomes like emissions avoided, jobs created, or improvements in access to essential services attributable to their investments.
• Data and Analytics Advances: The rise of fintech and climate analytics is enabling more rigorous impact tracking. Artificial intelligence and big data are being deployed to analyze satellite imagery for deforestation, estimate supply chain carbon footprints, and aggregate ESG/impact data from thousands of sources. Improved data quality was identified as a key industry focus in 2024, with 85% of investors saying better tools are needed to assess companies’ sustainability performance.⁴⁶ The good news is that new platforms can provide near-real-time monitoring of impact metrics – for example, tracking a portfolio’s carbon intensity or a bond’s proceeds usage – making it harder to hide behind glossy sustainability reports. This technological boost is making impact measurement more feasible and credible than ever before.
• Investor Stewardship and Engagement: Another related trend is that major institutional investors are linking their stewardship efforts to impact outcomes. Rather than just voting proxies based on ESG ratings, asset owners (like large pension funds) are setting thematic engagement goals – for instance, pushing portfolio companies to align with a 1.5°C climate trajectory or to improve workforce diversity by set percentages. In effect, investors are acting as stewards of impact, not merely risk managers. This active ownership amplifies the shift: capital isn’t just avoiding “bad” companies on ESG scores; it’s pushing all companies toward better practices and outcomes.

Together, these factors create a reinforcing cycle: demand for measurable impact is rising, and the ability to measure and report impact is improving. By late 2024, an industry survey found that despite politicization, 73% of asset managers expect sustainable investing to grow significantly in the next 1–2 years, citing client demand and regulatory tailwinds.⁶ The narrative is increasingly that sustainable finance must deliver real-world results, not just adhere to checkboxes.

IV. Implications for Institutional Investors

For institutional investors – pension funds, insurers, sovereign wealth funds, endowments – the evolution from ESG to impact carries important strategic implications:

• Reassess Investment Strategies: Traditional ESG integration will remain necessary (to manage financial risks from ESG factors), but it may not be sufficient. Leading investors are now developing dedicated impact investment strategies alongside ESG strategies. This could mean allocating a portion of the portfolio to thematic impact funds (e.g. climate infrastructure, impact private equity) or setting portfolio-wide impact targets (like a target to reduce portfolio CO₂ emissions by 50% by 2030, or to finance a certain amount of renewable energy capacity). Impact objectives can coexist with financial objectives; in fact, many institutions see them as intertwined with long-term performance.
• Enhance Due Diligence and Reporting: With more emphasis on outcomes, due diligence processes are adapting. Investors need to scrutinize not just a fund or project’s ESG policies, but how it will generate positive impact and how that impact will be measured. Impact due diligence includes evaluating a manager’s theory of change, the robustness of metrics used, and whether third-party verification is in place. On the reporting side, asset owners should prepare for deeper reporting to their beneficiaries or stakeholders – for example, providing an annual impact report quantifying the social and environmental benefits achieved by the portfolio (in addition to financial returns). This level of transparency can help maintain credibility and trust as skepticism of “greenwashing” remains high (85% of investors globally say greenwashing is a growing problem, according to a 2024 EY survey).
• Navigate Regulatory Compliance: Regulation is moving quickly in this arena. Investors operating globally face a patchwork of rules – from the EU’s stringent disclosure mandates and taxonomy requirements to more voluntary frameworks elsewhere. Institutions will need to build internal capacity or hire expertise to ensure compliance and to leverage these frameworks. On the positive side, clear rules can create competitive advantage: for instance, funds classified as Article 9 under SFDR saw significantly higher inflows in 2023 than Article 8 funds.⁵ As they signaled to clients a higher sustainability ambition. Those who can authentically attain such classifications may capture capital from the growing pool of impact-focused capital.

• Focus on Innovation and Collaboration: Achieving impact at scale often requires new investment approaches and collaboration. We’re seeing growth in blended finance models and public-private partnerships (as covered in other posts in this series). Institutional investors might partner with development banks or foundations to co-invest in projects with both impact and return, utilizing mechanisms like first-loss capital or guarantees to boost risk-adjusted returns. Additionally, investors are participating in industry initiatives to standardize impact accounting – for example, working with bodies like the Impact-Weighted Accounts Initiative to pilot how companies report social and environmental impacts in monetary terms. By engaging in such innovation, investors not only improve their own impact outcomes but help shape a financial system more conducive to sustainable development.

V. Conclusion: The Future of Sustainable Finance is Impact-Driven

Sustainable finance has always aimed to reconcile financial performance with societal good. The evolution from ESG to impact is a natural next step in that journey. ESG investing helped mainstream the idea that “non-financial” factors matter to risk and return; it forced companies to improve disclosures and practices. But it also taught us the limits of focusing on scores and policies without clear end goals. Impact investing picks up where ESG leaves off, insisting that capital must not only manage risks but actively drive positive change – and prove it.

This shift is well underway. As of 2025, the industry’s focus has pivoted to improving data quality and impact measurement as key to future growth.⁶ Asset owners and managers who embrace this will likely be better positioned to create sustained value. They will be the ones who can tell stakeholders a compelling story not just about how their portfolio is managed, but what it is tangibly achieving – whether it’s reducing greenhouse gas emissions, expanding clean water access, or improving community livelihoods. In turn, they can unlock new opportunities: investments that deliver competitive returns and address global challenges like climate change and inequality.

The evolution toward impact does not mean ESG considerations disappear; rather, it means they become means to an end. We will still assess governance quality or labor practices, but ultimately to understand and improve the outcomes that flow from our investments. As one London Business School commentator noted, what’s needed now is to treat ESG less as a branding exercise and more as strategic foresight – focusing on long-term real value.¹ By concentrating on impact, sustainable finance can fulfill that promise, driving capital toward its highest purpose. In doing so, it can also rebuild confidence: investors and the public can see and measure the benefits that sustainable finance delivers, renewing momentum in the face of any political headwinds.

VIII. Resources & References

1. Ioannis Ioannou, “What the ESG Backlash Reveals,” London Business School – Think, 31 March 2025. (By 2025, ESG faced political pushback, with mentions of “ESG” peaking in 2023 and falling as companies rebrand efforts).
2. Aleksandra Heflich and Jerome Saulnier, Potential Economic Impact of European Sustainable Finance, European Parliament Briefing, 19 Sept 2024. (EU reached an estimated €6.6 trillion in ESG assets in 2024, ~38% of total EU AUM).
3. Zero Carbon Analytics, “EU’s sustainable finance rules underpin global leadership,” 2024. (Approximately 87% of global sustainable fund assets by AUM are domiciled in Europe as of 2023; Europe also saw strong fund inflows in Q1 2024 versus U.S. outflows).
4. SustainAbility Institute by ERM, Rate the Raters 2023 (March 2023). (ESG rating providers under intense scrutiny; regulators and investors concerned about data accuracy and influence of ratings).
5. Zero Carbon Analytics, citing Bloomberg Intelligence SFDR Barometer Q1 2024. (Total SFDR-aligned fund assets reached $13 trillion in Q1 2024; Article 9 “dark green” funds – with strict impact criteria – accounted for only ~2.9% of assets, vs 57% for Article 8 funds. The European Commission is reviewing SFDR due to greenwashing and definitional issues).
6. US SIF, 2024/2025 Sustainable Investing Trends Report – Executive Summary, Dec 2024. (73% of U.S. survey respondents expect sustainable investing to grow; 36% prioritizing impact and thematic investing. Industry focusing on improved data, AI analytics, and impact measurement to overcome challenges like anti-ESG backlash).
7. Costanza Consolandi and James P. Hawley, “From ESG to Sustainable Impact Finance: Moving Past the Current Confusion,” SSRN (Jan 2024). (Argues for integrating externality data into finance – accounting for environmental and social impacts – to modify portfolio theory and redefine financial materiality).

Note) 'Resources & References' packets have been prepared with the help of AI and verified by humans.