The ESG Backlash Changed Sustainable Investing. Where Do We Go Next and Can AI Help?

The ESG backlash has reshaped the conversation around sustainable investing. After years of rapid growth and outsized expectations, the industry now finds itself at a critical inflection point. Political pushback, evolving regulations, and questions about performance have prompted investors and asset managers to reassess their strategies and rebuild trust.

While these concerns have been strongest in the United States, there is growing pushback in Europe. Europeans were net sellers of sustainable mutual and exchange traded funds for the first time on record in 2025, pulling out $1.2 billion.¹

Some of this backlash is deserved. Oversimplified narratives and weak evidence have eroded confidence in certain approaches, while black-and-white thinking around net zero, diversity, and fund labeling has created new risks. As the industry pivots, investors face a more complex challenge: moving beyond slogans to embrace nuance, transparency, and rigorous evidence. In this context, AI is emerging as a valuable tool.

Meet the Experts

In this episode of Sustainability Wired, Alex Edmans, Professor of Finance at London Business School and author of Grow the Pie, joins Clarity AI’s Chief Sustainability Officer, Lorenzo Saa, to explore how investors can navigate this moment. The discussion examines the roots of the ESG backlash, why nuance and tradeoffs are critical for long-term credibility, and how AI can support a more thoughtful, data-driven approach to sustainable investing.

What emerges is a pragmatic vision for the next phase of sustainable investing. One where evidence, transparency, and careful use of AI will be essential to restoring trust and driving impact.

Key Moments

00:00 – 00:59	Introduction
01:00 – 02:30	Sustainable Investing Facing Headwinds
02:31 – 05:09	Introduction to Alex Edmans
05:10 – 08:28	Why Is There a Sustainability Backlash?
08:29 – 12:09	Decoding the Research on Sustainability
12:10 – 17:03	Getting Sustainability Terms Right
17:04 – 20:59	Net Zero Targets Need a New Perspective
21:00 – 24:29	Nuance vs. Black & White Thinking
24:30 – 29:55	Merit and Diversity in Hiring
29:56 – 36:11	Finding Hidden Signals of Alpha
36:12 – 38:29	Can AI Address Sustainability Challenges?
38:30 – 39:59	Rapid fire questions
40:00 – 44:39	The Art of Sustainability
44:40	Closing commentary

Notable Quotes and Insights

These moments from the episode highlight how investors can respond to the ESG backlash by embracing nuance, improving transparency, and using AI carefully to support evidence-based decision-making. Here are five insights from Alex Edmans that stood out:

1. Some Pushback Is Deserved

The ESG backlash is not purely political or ideological. Alex argues that part of it stems from legitimate concerns about the quality of evidence used to promote ESG investing. Weak claims and overstated promises have undermined trust. Recognizing where the industry contributed to this backlash is essential to restoring credibility.

“Greenwashing…has led to a lot of the pushback against sustainability. And I think some of this pushback is deserved.”

2. Nuance Beats Slogans

Binary narratives—such as “1.5 or bust” for climate targets or “diversity always improves performance”—risk alienating investors and the public. Alex stresses the importance of embracing nuance and communicating tradeoffs transparently, especially as the industry navigates complex issues like net zero transitions and social impact.

“[That is] the danger of black and white thinking, seeing things in binary terms. We see this a lot in terms of climate where it’s such as 1.5 or bust, which is: we need to do everything that we can to hit this 1.5 number, even if it means decommissioning oil and coal and reducing energy security.”

3. Sustainable Investing ≠ Guaranteed Outperformance

A key driver of skepticism is the claim that all sustainability factors automatically enhance financial returns. Alex cautions that while some sustainability factors do create long-term value, others do not. Investors must avoid treating sustainability as a guaranteed path to alpha. A more rigorous, evidence-based approach is needed.

“It is certainly true that some sustainability factors, like employee satisfaction, are correlated with long term returns, but others are not. And the idea that all sustainability pays off, that just demographic diversity magically improves long term performance. If you are to look at the data with even a small level of scrutiny, you find that the correlations are very weak, non-existent.”

4. AI Is a Valuable Tool, With Limitations

AI can accelerate sustainability analysis by processing large data sets quickly. However, Alex emphasizes that it cannot replace human judgment, especially when it comes to qualitative factors like corporate culture, leadership intent, or the credibility of net zero strategies. Successful investors will combine AI with deep domain expertise.

“AI is a useful tool, but I don’t think it can ever replace, the value of of humans, for example, to be able to speak to management. And to get a feel for the company as to whether the leadership takes these issues seriously, how they manage tradeoffs, and what they view as the purpose of the firm.”

 5. Rebuilding Trust Requires Transparency

As the industry pivots beyond the peak of the ESG backlash, transparency will be key to restoring trust. Alex urges investors to clearly articulate fund objectives, acknowledge tradeoffs, and avoid overstating ESG performance claims. Credibility and evidence must take priority over marketing-driven narratives.

“We can’t base the entire case for sustainability on one paper. We would like to look at the body of evidence and my reading of the body of the evidence is that there was certainly a case for taking sustainability seriously. There are papers showing that certain sustainability issues do lead to long term returns, but it’s certainly not that everything which is called ESG is going to be improving returns.”

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