Investors and The Ostrich Effect in Climate Investing
An opinion piece by Michel Brutti, Founder and CEO of Clear Skies Investment Management.
In today’s market, many investors (portfolio managers, institutional asset owners) consider themselves responsible or sustainable investors. At first sight, someone should feel satisfied that the Principles for Responsible Investment (PRI) organisation has over 5,200 signatories representing US$139.6 trillion in assets under management (AUM) in 2025. Nevertheless, that person could be misled into thinking that the major issues affecting us – such as climate change, biodiversity loss and various social issues – are really being addressed by investors.
If we examine the world under a science-driven magnifying glass, the outcome of addressing those major global issues would be quite disappointing. Indeed, let’s consider the climate change issue: Fossil fuels (coal, oil, and gas) are the primary driver of climate change, accounting for approximately 70% of total global greenhouse gas (GHG) emissions. When production, refining, and transportation are included, oil-related activities contribute significantly to roughly 80% of total GHG emissions stemming from fossil fuels. Global oil demand continued to rise in 2025 with consumption estimated to have increased by roughly 1.1 million barrels per day (mb/d). Despite weakening growth compared to previous years, total demand in 2025 approached the peak level of 105 million barrels per day.
Does ESG investing meaningfully address climate change? If we look at the evolution of the level of GHG emissions worldwide over recent years, the answer is clearly NO.
Does impact investing meaningfully address climate change? This article shows that the answer is clearly YES. In that case, it should be applied to ALL asset classes, not only to private markets, as many impact investors wrongly believe.
ESG investing, which stands for Environmental, Social, and Governance investing, generally focuses on integrating ESG risks into traditional investment decisions. The goal is often to improve risk management and long-term financial performance by evaluating companies based on ESG metrics. In practice, ESG strategies typically invest in public companies and apply screening or scoring systems to identify firms with relatively stronger ESG profiles. However, these portfolios often end up holding many of the same companies found in standard index funds, including large technology firms, banks, and even some energy companies that have some transition plans. Those portfolios also tend to show a carbon footprint that is lower than their respective benchmarks in order to make investors feel good. However, a low portfolio carbon footprint is no indication of a portfolio addressing climate change, or energy transition. Clearly, those equity portfolios do NOT address climate change, they circumvent the issue.
One of the main criticisms of ESG investing is that it tends to optimize portfolios rather than help in driving real-world change. In addition, ESG ratings can vary significantly between providers, which raises questions about their reliability and the actual environmental performance of highly rated firms. ESG investing may change which set of companies investors hold in a portfolio. However, this does not necessarily change the level of global emissions or the pace of decarbonization.
Impact investing takes a different approach by explicitly aiming to generate measurable positive environmental or social outcomes alongside financial returns. In the context of climate change, impact investors intentionally allocate capital to businesses, technologies, or projects that contribute to climate mitigation or adaptation. This might include companies developing renewable energy infrastructure, energy-efficiency technologies, electrification solutions, or carbon removal systems. Investors also typically measure and report impact metrics, such as greenhouse-gas emissions avoided or the amount of clean energy capacity deployed. Because of this intentionality and measurement, impact investing has a clearer pathway to influencing real-world climate outcomes than traditional ESG strategies. Organizations such as the Global Impact Investing Network and the Impact Frontier have developed frameworks that emphasize measurable outcomes, corporate and investor intent, and transparency in reporting impact.
More specifically, looking at public equities, a climate impact portfolio strategy begins by identifying the sectors that are most critical to achieving the energy transition rather than starting from an equity index and building portfolios around it. The companies offering solutions in electrification, energy efficiency, grid infrastructure, and low-carbon industrial processes can be identified in different sectors. Within those sectors, investors can identify the best companies whose growth may directly be tied to delivering tangible climate solutions. We can call those companies the “enablers”. Those businesses benefit structurally from the transition and can generate competitive long-term returns precisely because they solve real world problems. This investment approach can allow capital to flow toward underappreciated transition “enablers” rather than crowded headline names. Through fundamental research and engagement, investors can support companies that are materially advancing decarbonization while capturing mispriced opportunities in the market.
In public equity markets, the benefits of this investment approach are that it is long-term focused, it addresses major issues, and it is aligned with fundamental shifts being experienced by the world’s economies. For example, everyone currently talks about Artificial Intelligence (AI), the penetration of AI in our work and lives will evolve over time and will not regress or disappear. This AI tsunami we are all experiencing requires major improvements in energy efficiency, data center cooling, smart electric grids, new power generation. Many companies working on those solutions are experiencing accelerated growth of revenues, improving operating margins and strong share price performance. Investors’ portfolios focused on quality/growth companies “enabling” the transition are benefiting from the strong share price performance of those “enablers”. Companies allocating capital for the transition are also well positioned to avoid the pitfalls of being dependent on commodity prices like in the old economy.
A core principle of impact investing is additionality, meaning that the capital provided helps enable outcomes that might not otherwise occur. Some investors would argue that impact investing is done only in private markets, where investors have a much larger role in the business operations of an investee. However, shareholder engagement with investee companies can occur as well in public markets. Through shareholder engagement, impact investors in public equities can contribute to climate progress in various ways. By asking companies for stronger commitments to decarbonization, better corporate disclosure related to climate change and transition pathways that are more closely aligned with the Paris Agreement standards, such as those outlined by frameworks like SBTi (Science-Based Targets Initiative), investors in public equities are pushing corporations to adopt strategies leading to accelerated decarbonization of their activities. Those shareholder engagement initiatives, mostly done through investor coalitions, use shareholder influence to pressure major emitters to set emissions targets and transition their business models. The impact of those shareholder engagements should also be recognized as being positive by the investor community.
Ultimately, the contrast between ESG and impact investing reveals a fundamental truth: reallocating capital within existing systems is not enough to address a systemic challenge like climate change. While ESG approaches may improve portfolio optics and risk management, they often fall short of driving real-world decarbonization. In contrast, impact investing through intentional capital allocation, a focus on transition “enablers,” and active shareholder engagement offers a more direct and measurable pathway to change. If investors are to avoid the “ostrich effect” and genuinely confront the climate crisis, they must move beyond passive sustainability labels and embrace strategies that actively contribute to the transition. This shift is not only necessary from an environmental standpoint but also represents a compelling opportunity to align long-term financial performance with meaningful, real-world impact.
