Can sustainable investing be counterproductive?

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Article Type
The Wider Lens
Topic
Opinion
Published
September 25, 2026
Read time
3 mins
Author
Ritchie Thomson
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At Aegon Asset Management, we believe sustainable investing works best when it is applied thoughtfully and with a clear focus on real-world outcomes. A recent paper, Counterproductive Sustainable Investing: The Impact Elasticity of Brown and Green Firms1, by Samuel M. Hartzmark and Kelly Shue, challenges some common assumptions about climate investing and raises an important question: how can investors use capital to achieve the greatest real-world environmental impact?

 

Rethinking the relationship between capital and decarbonisation

 

The paper examines climate investing and questions the idea that investors can maximise impact simply by moving capital away from high-emitting companies and towards companies that already have low-emissions.

 

The authors argue that this approach may not always deliver the intended result. Companies with already-low emissions often have limited scope to further reduce emissions, while high emitting companies may need access to affordable funding to invest in cleaner technologies and processes.  

 

The paper introduces the idea of ‘impact elasticity’, which looks at how a company's emissions change when its cost of financing changes.  The authors find that high-emitting companies are more sensitive to these changes than low-emitting companies.  In their analysis, when financing became more expensive for these companies, emissions intensity tended to rise. This suggests that higher financing costs can make it harder for some businesses to invest in decarbonisation and environmental improvements. This is particularly relevant in hard-to-abate sectors such as steel, cement and other heavy industries, where reducing emissions often requires substantial upfront funding. New technologies, cleaner production methods and major infrastructure upgrades can take years to pay back. If capital becomes more expensive, companies may be less willing or able to make those investments, even where they have credible plans to transition.

 

The paper also challenges the way investors measure environmental progress, arguing that too much attention is placed on percentage improvements in emissions, rather than the absolute scale of emissions reductions. 

 

This matters because a relatively small improvement at a high-emitting company can represent a much greater reduction in real-world emissions than a larger percentage improvement at an already low emitting company.

 

However, there are important caveats.  Cheaper finance for a renewable energy company or other climate solutions provider may not significantly reduce that company's own emissions intensity but it could help the company grow faster, build more renewable energy capacity and reduce emissions across the wider economy. In this case, the benefit comes from expanding low-carbon solutions rather than further reducing the company’s already low emissions.

 

Not all high-emitting sectors face the same transition challenge. Steel, cement and industrial manufacturing may need cleaner production methods or technologies. Parts of the fossil fuel sector may require more fundamental changes to business models and end markets. The role of capital therefore varies significantly between sectors.

 

A further caveat is the papers reliance on emissions intensity as its main measure of impact. Because emissions intensity is typically measured against revenue, it can rise when revenues fall, even if emissions remain unchanged. A rise in emissions intensity does not therefore necessarily mean real-world environmental outcomes have worsened.

 

Focusing on where capital can make the biggest difference

 

Despite these caveats, we agree with one of the paper’s key conclusions: supporting high-emitting companies with credible transition plans may deliver greater real-world environmental impact than simply providing more capital to businesses that are already low carbon.

 

This philosophy sits at the heart of our climate transition investing approach. The transition to a low-carbon economy will not be achieved solely by financing companies that are already green. It will also require supporting businesses in emissions-intensive sectors where credible transition plans, effective management and access to capital can drive meaningful emissions reductions.

 

While some of the paper's findings depend on the metrics used, it reinforces an important point: the greatest opportunities to reduce emissions often sit in the sectors with the largest footprints. Successful climate investing is therefore not simply about backing today's green leaders. It is about identifying where capital can support credible transition, help remove barriers to decarbonisation and contribute to a lower-carbon economy.

 

 

1. Counterproductive Sustainable Investing: The Impact Elasticity of Brown and Green Firms | NBER

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Author

Ritchie Thomson
Senior Responsible Investment Associate
Ritchie Thomson is a senior responsible investment associate responsible for analyzing and monitoring key climate change issues facing companies and industry sectors.
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