ESG investing has reached new heights, indicating that more and more investors and stakeholders are concerned about the environment, society, and governance. New data from Morningstar shows that global ESG fund assets now stand at more than $2 trillion. 7 trillion, over two and half times increase in the last one year. This expansion is fueled by the rising investors’ interest, legal requirements, and the understanding of the financial impacts of sustainability matters.

Large investors are driving the process of ESG integration, and pension funds, sovereign wealth funds, and asset managers are changing their investment approach to incorporate sustainability objectives. BlackRock, the largest asset manager globally, has been very much vocal on its sustainable investment strategy and has vowed to make sustainability the new normal for investment and has urged companies to step up their ESG game.

This trend of ESG investing is not restricted to the public markets. This paper aims to explore the growing tendency of private equity firms to integrate ESG factors into their investment decision-making processes and portfolio management. This change is due to two factors; the first is risk management and the second is the understanding that good ESG performance can create value in the portfolio companies.

Green bonds and sustainability-linked bonds have become two of the most sought-after tools for raising capital by firms and governments to finance green initiatives or encourage sustainable measures. The Climate Bonds Initiative has found that the global green bond market is set to hit $500bn in 2024, which will be a major step for the sustainable debt market.

It is clear that the regulatory change is one of the most significant factors that influence the sustainable finance. The EU’s SFDR and Taxonomy Regulation are shaping the ESG disclosure and classification norms and are having an impact on investment practices beyond European borders.

In the United States, the Securities and Exchange Commission (SEC) is currently working on the potential new rules on climate-related disclosures that will affect the corporate reporting and investors’ decision.

With the rise of ESG investing, more and more investors are questioning the authenticity of the so-called ‘green’ or ‘socially responsible’ practices of companies or investment products. There is ongoing effort by the regulators and industry bodies to come up with better guidelines and ways of verifying the credibility of the ESG claims in order to shield the investors from being misled.

It is also evident that the focus on ESG is also creating new products and services within the financial industry. Banks and fintech firms are coming out with new products and services to assist investors to identify ESG risks and returns, and also presenting sustainable investment products to the retail investors. New forms of sustainable finance, such as impact investing, which aims at producing social and environmental outcomes in addition to financial returns, are also emerging to enrich the choices for investors.

Climate risk has continued to be one of the key themes of ESG investing as more investors look at climate risk and return. The recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) are becoming popular, which help companies in identifying and reporting the climate-related risks and opportunities.

Nevertheless, there are some issues that can be observed in the ESG investing environment. One of the most important issues that remains unresolved is the problem of non-standardized ESG data and metrics, which hinders investors’ ability to compare companies and their performance. There are ongoing attempts to improve the coherence of reporting frameworks with the ISSB, for instance, working to establish a global minimum for sustainability reporting.

Sustainable finance is becoming a new normal in the world of investment and it is changing the way companies make their decisions. The next few years will tell whether ESG investing will live up to the expectations and create a positive environmental and social impact alongside decent financial returns.