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Rational Sustainability: Moving beyond ESG theatre to targeting returns and evidence-based outcomes

By Suresh Mistry, Head of Sustainability

Introduction

The world of sustainable investing has reached a critical juncture. After years of explosive growth and increasingly complex frameworks, we’re witnessing a necessary maturation that’s forcing the industry to confront an uncomfortable truth: much of what we’ve been doing simply isn’t working.

As someone who has built my career on responsible investing principles and founded Alquity with sustainability at its core, I’m not abandoning these values. Instead, I’m advocating for what I call “rational sustainability” – an evidence-based approach that prioritizes measurable outcomes over compliance theatre and ideological rigidity.

Traditional ESG approaches have become victims of their own success. What began as a genuine attempt to integrate environmental, social, and governance factors into investment decisions has morphed into a box-ticking exercise dominated by buzzwords and greenwashing. While ESG frameworks have played a foundational role in mainstreaming sustainability and improving corporate transparency, too many firms are conducting ESG analysis that adds no real value, implementing voting strategies that drive no meaningful change, and tracking metrics that have little real-world impact.

The result? A disconnect between the resources we’re deploying and the outcomes we’re seeking. Worse still, this approach has contributed to the recent backlash against sustainable investing, as investors question whether these strategies actually deliver on their promises – be that returns or impact.

Values-driven, evidence-led

Rational sustainability starts with a simple premise: every element of our sustainability process must be justified by evidence of its effectiveness. This does not discount the importance of values-driven investing or the long-term nature of some sustainability outcomes, but it does require us to be honest about what is working and what is not.

This doesn’t mean abandoning our values or aspirations. Our commitment to responsible capitalism and creating positive social and environmental impact remains unchanged. What changes is our willingness to be ruthless about how we pursue these goals.

At its heart, rational sustainability is about looking at sustainability through an evidence lens. It means asking hard questions: Does our engagement strategy actually influence corporate behaviour? Are our exclusions creating meaningful change or simply shifting problems elsewhere? Do our impact metrics reflect genuine outcomes or just good intentions?

Our experience shows rational sustainability offers advantages over traditional approaches. First, it eliminates waste – both of resources and credibility. By focusing only on activities that demonstrably work, we can deploy our sustainability efforts more effectively.

By grounding our approach in evidence rather than rhetoric, and by respecting the diverse motivations that have shaped sustainable investing to date, we can restore confidence in sustainable investing’s ability to deliver both returns and impact.

In addition, it drives innovation. When we’re not constrained by conventional ESG wisdom, we’re free to explore new approaches that might be more effective at creating the change we want to see. For instance, our adoption of portfolio-level KPIs in Emerging Markets is a direct result of challenging conventional engagement models and reporting. In our Emerging Market strategies, we’ve enhanced our subjective engagement outcomes by implementing KPIs that provide clear, portfolio-level data. These indicators track annual changes in important ESG disclosures for every company in our funds, offering clients greater transparency on progress at a portfolio level.

• Does our engagement strategy actually influence corporate behaviour?
• Are our exclusions creating meaningful change or simply shifting problems elsewhere?
• Do our impact metrics reflect genuine outcomes or just good intentions?

Implementation: the importance of being honest

At Alquity, rational sustainability has been at the heart of our investment process for over a decade. However, we frequently review our investment approach, from stock selection criteria to engagement strategies to ask ourselves if what we are doing continues to have value and what more we could do to incorporate learning and developments in sustainability research.

One such refinement was to incorporate a lower risk premium into our valuations for companies where our material ESG analysis had highlighted peer-leading standards. Our rationale being that these actions should lead to increased future profitability and business resilience and as long term investors we should quantify that within the valuation process.

We are also now placing a greater emphasis on collaborative initiatives, especially in highly technical sectors such as food production. While direct engagement remains a valuable tool where we have access and influence on management teams, we believe that in our context, collaborative efforts can leverage our resources more effectively and drive broader systemic change.

When applied rationally, ESG is a powerful tool for identifying and mitigating risks at the company level. By focusing on material sustainability factors, we can reduce exposure to long-term risks and enhance the resilience of individual holdings. Within this framework, governance remains foundational – not just a pillar of ESG, but the structure that underpins credible environmental and social commitments. However, ESG analysis alone does not replace the need for comprehensive portfolio-level risk management. Broader considerations such as diversification, macroeconomic exposure, and systemic risks remain essential.

Whatever you do, make it count

Rational sustainability isn’t about doing less – it’s about doing better. It’s about having the courage to abandon practices that don’t work, even if they’re industry standard, and the creativity to develop new approaches that do.
At Alquity, our mission is to deliver investment performance with purpose – with the aim of contributing to positive social and environmental outcomes. In a world of shifting narratives, our approach remains clear and consistent and has been applied for over a decade.

The sustainable investing industry stands at a crossroads: it can either continue down the path of increasing complexity and hopeful assumptions, or embrace a more rational approach that prioritises evidence over dogma and focuses on outcomes rather than compliance.

I believe the choice is clear. The question is whether the industry has the courage to make it.