Will an emphasis on materiality, or financial relevance, help sustainable funds?
Sustainable investing has been in the doldrums for three years, dismissed as “woke investing,” and its themes, including institutional diversity, equity, and inclusion practices, renewable energy, and electric vehicles, have been targeted by the Donald Trump administration. Many sustainable funds have also been poor performers, though lately, that’s started to turn.
Quarterly Sustainable Fund Flows
One big source of criticism: The term “sustainable investing” is too big of a tent. It includes both people who want do good through their investments (so-called values-based investors) and people who want to avoid environmental, social, and governance risk, including some conventional investors. Money managers tried to straddle that uneasy divide without explaining themselves to investors, leaving themselves open to criticism instead. And under the new presidential administration, some of the investment themes became controversial.
“These different objectives really kind of crash into each other,” says Lisa Cooper, founder and CEO of Figure 8 Investment Strategies, a financial advisor that specializes in sustainable investing. “I’m not sure we were ever under one big tent.”
But a consequence of the backlash against ESG is that it forced the sustainable-investing industry “to coalesce around materiality,” or financial relevance, says Anna Totdahl, investment officer for ESG and sustainability at Oregon State Treasury.
Will it help? It can’t hurt. I discussed the subject on a May 2025 panel with Cooper; Totdahl; Beth Williamson, head of sustainable equity research and associate portfolio manager at Calamos Investments; and John Streur, chief investment officer of all material risk investment strategies for Boston Common Asset Management. The panel was organized by Portland Women in Investment Management and Portland State University.
Here are some key findings.
1) Materiality has lots of different meanings. Here are the key definitions.
a) The legal and financial definition describes material that a reasonable investor would consider important in making an investment decision.
b) ESG-related factors are also considered material to companies’ operations and financial growth. They are used by sustainable and conventional investors who believe the potential for ESG issues to affect company value is real.
c) Dual materiality addresses both the risks and opportunities related to material factors that a company is exposed to, and it also describes a company’s impact on the world around it, even if these factors don’t directly affect the company’s financial statements. These include “unpriced externalities,” or the consequences of its economic activity that affect a third party and that aren’t yet reflected in the price of the good or service the company provides. Dual materiality is a key element of Europe’s approach to corporate sustainability reporting.
d) “Principles driven” or “values based” materiality considers company characteristics that matter to a particular individual or group, such as faith-based investors who want to avoid weapons or “sin stocks.”
2) Materiality means different things for different asset classes. But it’s always used in the service of better returns.
a) It “looks very different in fixed income than in private equity or real estate,” says Totdahl of Oregon State Treasury, a pension fund. Real estate investors might fret about physical property risks, such as wildfires, extreme heat, and drought.
b) For publicly traded companies, Totdahl says, investors might compare “how companies are managing similar risks, or how they’re working with their supply chain or how they’re engaging their different stakeholders.” Stock investors might focus on reducing exposure to sectors in long-term secular decline or to industries bearing environmental or social risks. These have “a direct short-term financial impact on the company or, over a longer-term period, could create financial risk through egregious or significant environmental or social impact,” says Williamson of Calamos, an investment advisor that runs mutual funds. “My job is … to make the right investment decisions to beat our benchmarks.”
c) “Materiality is something that matters to the business and therefore matters to the investor … My job is always to beat the market,” says Streur of Boston Common, an investment advisor that runs mutual funds and has a strategy that looks closely at material risks described by companies in regulatory disclosures, of which traditional ESG risk represents about 20%.
3) Don’t make the mistake of thinking companies are unaware of the ESG risks, which can affect competitiveness.
a) Consider that today, China is the world’s largest player in renewable energy, helping emerging economies leapfrog fossil fuel systems. That gives them “a competitive advantage,” says Streur. “Ultimately, renewable energy is a technology-driven issue, and it follows a predictable innovation curve based on the ability to consistently increase the output. So the risk to companies both experiencing loss due to climate change and creating risk to themselves by not adapting their energy source as the world transitions is going up significantly. Thus, only four of the 3,000 publicly traded companies in the US that Streur’s team follows have reduced their statements of risk related to climate change. By contrast, about 135 had “significantly increased their risk assessment” in 2025 filings.
b) A similar competitive dilemma arises for companies and their workforce, or “human capital” practices. The Trump administration in its first days signed three executive orders seeking to end DEI programs in the public and private sectors. Says Streur: “Companies might be adjusting their language to appease the administration, but they’re not changing their practices.” Corporate support for DEI continues because, increasingly, companies are creating profits from intellectual property and intellectual capital, which require highly skilled workers. Some 43% of the US workforce is nonwhite, and educational attainment has risen for both women and people of color, says Streur, adding that “a company that wants to produce intellectual property, ideas, patents, and enjoy high profits has to be able to create a workplace that allows people across all of these diverse groups to do their best work.”
4) Investors considering ESG risk need to ensure they’re material to the company. (One resource is the SASB materiality map). They should consider ESG opportunities, too.
a) “While DEI can be argued to be important to all workplaces, the financial materiality of this topic varies,” says Williamson. Consider that both Target TGT and Deere DE were once lauded for their DEI initiatives but retreated from them amid criticism. Target’s stock dropped by 12% after it ended its diversity initiatives, while Deere’s remained relatively stable, and Deere faced no major lawsuits and no reported public boycotts.
b) Why so different? DEI is more material to a consumer retail company than to an industrial machinery company, says Williamson. Target employs a larger, more diverse workforce than Deere, and its customer base is larger and more diverse. Historically, the company catered to its diverse workforce and customer base by offering a wide range of products and services, including those from minority- and LGBTQ+-owned businesses. It was hailed as a top employer for LGBTQ+ workers and had a perfect score on the Corporate Equality Index. “The reversal of the company’s programs is seen as a betrayal to the people who built and supported the company, resulting in reputational damage, reduced foot traffic, and ultimately a decline in sales,” Williamson says. On the other hand, “Deere’s product range has always focused on its fairly homogeneous agricultural consumer base, with limited ability to diversify its product offerings.”
c) The same analysis can be used to find global leaders—“opportunities for companies that we believe are going to be able to operate with greater financial performance in the future with increasing ecological risk and growing populations,” says Williamson.
5) Future material risk factors are important to investors, too, and not for reasons related to values.
a) Company risks may relate to quality, obsolescence, and regulations or relate to harm to the environment, health, or employees. One matters to financial returns now, and the second may be “something causing significant harm externally to the environment or to a large group of people and might matter for the future,” says Streur.
b) Climate change is one such long-term risk, and issuers aren’t currently being charged for their carbon emissions that cause global warming. Indeed, an Securities and Exchange Commission initiative to require companies to disclose emissions was reversed under the new administration, even if the SEC requires companies to disclose other material risks. But other jurisdictions require such disclosures, including California. Eventually, this may lead to regulatory risk, too. These are meaningful to an issuer, its income statement, and stock price. Environmental damage to a community “could, over the long term, increase the reputational risk, legislative costs, or operational costs of that company,” says Williamson. “Just because it’s not in the short-term definition doesn’t mean you can’t [have] financial risk over the longer term.”
c) Materiality becomes clearer as more ESG data becomes available. “Hardly any data” was available in 1999 when Williamson’s team began building its first sustainable funds, leading it to create its own framework to collect data and engage with companies. The data infrastructure grew more developed, with sustainability reports and issuer disclosures. And the term “greenwashing” originated as investors questioned the authenticity of some data.
6) Materiality frameworks are also useful for values-driven investors, many of whom screen out investments or seek to create impact.
a) Clients “want their capital to be powerful, to be directed specifically to things that can be additive to, and that provide social and environmental benefits. So think affordable housing, think renewable energy for the matter,” says Cooper of Figure 8, a financial advisor.
b) Such investors are often “looking for different things, different asset classes not described in public equities,” says Cooper. A case in point is bonds, for example; while the upside is limited, risk presents “the big downside.” So “with bond investing, our materiality work is very much focused on risk and not so much on the opportunity side.” One example: Dodging municipal bonds that received a credit downgrade in the wake of the devastating Los Angeles wildfires.
7) Engagement helps ensure companies are addressing material risks and opportunities.
a) Many companies are reluctant to broadcast how they address ESG risk in the current political climate. “If you pay attention to what companies are doing, it’s the opposite of what this ESG pushback would suggest,” says Streur.
b) They might tell investors that, while some customers might not be happy with DEI efforts, the efforts help with employee morale. “So they say, ‘We’re just not going to sing it from the mountaintop anymore,’ ” says Williamson. For example, there were 54% fewer disclosures on boardroom demographic data for the S&P 500 than last year. Says Williamson: “My job is to understand what data is available, how to understand what’s material, and how to continue to go out and get the needed material.”
8) Will this focus on materiality make sustainable investing popular with investors again? It can’t hurt that it focuses on returns.
a) Says Streur: “I don’t think that relevance has been lost. I think the current administration has created a large smoke screen. We’re not losing the war; we’re scrimmaging in an unaffected battle at the moment.”
b) Says Williamson: What’s happening now is “almost a market correction, and it was needed … I think it continues to exist, and the noise around it diminishes.”
