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ESG ratings often disagree, leaving many advisors wondering what’s real, what’s noise, and how to explain it to clients. Research suggests the divergence is structural: Different providers measure different things in different ways.1
The practical answer isn’t to chase a “right” score, but to treat ESG data as one input in a disciplined framework focused on long-term risk, resilience, and opportunity. At Shelton Capital Management, we view sustainability as an analytical lens that can enhance traditional fundamental research rather than replace it. Just as no single financial metric defines a company’s value, no single ESG score captures long-term business quality. Active management and research judgment remain important.
Sustainability analysis is most useful when it helps investors and advisors understand how structural economic forces may shape risk and opportunity over time. This includes energy demand, resource constraints, regulation, and physical risk.
Sustainability Already Embedded in Global Markets
Sustainable investing is no longer a niche concept. According to Morgan Stanley’s Sustainable Reality 2025 report, global assets in sustainable funds reached $3.92 trillion by mid-2025, the highest level on record.2 While sustainable funds represent roughly 6.7% of total global fund assets, their scale reflects deep integration into mainstream portfolios rather than a passing trend. Importantly, this growth has not primarily been driven by inflows.
In the first half of 2025, much of the increase in sustainable fund assets came from investment performance, not new capital.2 That distinction matters: It suggests sustainability factors are increasingly being evaluated alongside economic fundamentals, not simply investor sentiment.
Performance and Risk: Separating Cycles from Structure
Sustainable strategies can experience volatility, particularly during periods of rising interest rates or shifting policy expectations. But when viewed through a longer-term lens, data can offer a more balanced perspective. In the first half of 2025, Morgan Stanley reported that sustainable funds delivered a median return of 12.5%, compared with 9.2% for traditional funds over the same period, marking the strongest relative outperformance for sustainable funds in their data set since 2019.2 Outperformance was reported across asset classes, with sustainable equity funds modestly ahead of traditional peers and sustainable fixed income funds notably ahead, particularly in short- and medium-duration strategies.2
Risk characteristics were also reported as favorable. Morgan Stanley noted that sustainable equity funds exhibited lower downside deviation than traditional peers, indicating smaller losses during negative market periods. Over the longer term, it estimated that $100 invested in the median sustainable fund in late 2018 would have grown to $154 by mid-2025, compared with $145 for traditional funds.*2
These results do not guarantee future outcomes, but they reinforce an important point: Sustainable investing is not necessarily about sacrificing returns. Like any approach tied to innovation and capital investment, it experiences cycles, so maintaining discipline around fundamentals and valuation remains essential.
ESG Ratings Are Inputs, Not Investment Signals
One reason sustainable investing can feel confusing is the inconsistency of ESG ratings. The same company may receive widely different scores from different providers.1 This does not mean ESG data are useless — it means they must be interpreted thoughtfully. ESG scores can be helpful information inputs, not buy-or-sell signals. Sustainability analysis is most useful when it helps investors understand:
- exposure to regulatory and policy risk
- operational resilience and supply-chain vulnerability
- governance quality and capital allocation discipline
- sensitivity to climate, water, and resource constraints
What Individual Investors Are Actually Saying
Investor sentiment provides additional context. Morgan Stanley’s Sustainable Signals: Individual Investors 2025 reported that 88% of individual investors globally express interest in sustainable investing, and 85% believe it can deliver competitive financial returns.3 Crucially, interest is not driven by values alone. More than three-quarters of investors said sustainability considerations help them identify risks and opportunities, particularly related to climate, regulation, and long-term resilience.3 Among younger investors, engagement is even stronger. For advisors, this matters because sustainability increasingly shapes how clients think about the future economy — and how they expect portfolios to be positioned for it.
Corporate Behavior Tells the Same Story
Corporations are responding to the same forces. Morgan Stanley’s Sustainable Signals: Corporates 2025 reported that 88% of companies now view sustainability as a value-creation opportunity, not a cost center, and more than 80% said they can measure the return on investment from sustainability-related capital expenditures and operational changes.4 In the same report, 57% of companies reported direct operational impacts from climate-related events in the past year (including higher costs, disrupted operations, and lost revenue), and roughly two-thirds expected climate risks — physical or regulatory — to materially affect their businesses over the next five years.4 Sustainability is showing up in earnings, capital budgets, and balance sheets.
Systems, Not Slogans
From a systems-level perspective, incorporating climate risk is not built on policy alone, but a process grounded in adaptation, resilience, and infrastructure constraints. Global energy demand continues to rise, driven in part by AI, data centers, electrification, and digital infrastructure, regardless of shifts in climate policy. Electricity grids, water systems, and transport networks are aging, congested, and increasingly stressed. These pressures can translate into higher costs, reliability risks, and economic inefficiencies.
When systems run near capacity, capital investment may become increasingly necessary, and that dynamic can drive long-term opportunity. Rather than a smooth transition from fossil fuels to renewables, we are in a period of transitions in which total energy consumption continues to grow, requiring new sources to be added alongside existing ones to meet demand. This reality complicates simplistic “net zero” portfolio construction.
Excluding sectors based solely on current emissions can overlook companies that provide the essential materials, infrastructure, and technologies required for system reliability and future efficiency. Buying or selling securities generally does not directly change real-world emissions; it changes ownership. Real-world impact is more closely tied to investment in businesses that enable adaptation, efficiency, and resilience.
Infrastructure: A Capital-Intensive Opportunity Set
The scale of infrastructure needs reinforces this view. The International Energy Agency has estimated more than $400 billion invested in grids annually. Analysis suggests grid spending needs to rise substantially — on the order of ~50% by 2030 — to keep pace with demand growth and electrification.5, 6. Material constraints compound the challenge: Prices and lead times for critical grid components such as transformers have risen sharply in recent years.5
For long-term investors, such constraints can be signals. Capital-intensive systems with persistent demand and limited substitutes may create potential opportunities when approached selectively, while still requiring careful security selection and valuation discipline.
Renewable Economics Continue to Improve
Despite policy uncertainty, renewable economics continue to strengthen. Costs for solar photovoltaics and electric-vehicle batteries have declined materially over the past decade, improving cost competitiveness. Battery storage adoption has also grown faster than many earlier projections. These trends can reshape long-term cost curves, system reliability, and capital allocation decisions, even as short-term narratives fluctuate.
Sustainable Investing for Advisors
Use an approach that is consistent across market cycles:
- Active, research-driven security selection
- Selective integration, not rigid exclusions
- Focus on material sustainability factors that affect long-term value
- Emphasis on risk-adjusted returns, not labels or trends
Sustainability is not a replacement for diversification or traditional asset allocation. It is an expansion of analysis, one that helps investors better understand how long-term structural forces shape outcomes. Sustainable investing has moved beyond theory. Investor behavior, corporate capital allocation, infrastructure data, and market performance all point in the same direction: Sustainability reflects real economic forces shaping risk and opportunity.
There will be volatility, political noise, and periods of skepticism. That is normal for strategies tied to innovation and system-level change. However, over the long term, ignoring these dynamics risks overlooking some of the most durable drivers of value creation. Sustainability is not about predicting policy outcomes or following trends. It is about understanding how the world actually works and positioning portfolios accordingly.
As with any investment approach, there is no guarantee that incorporating sustainability considerations will improve performance or reduce risk. Results depend on market conditions, security selection, and valuation.
* Past performance is not indicative of future results.
Notes
1. Berg, Florian; Kölbel, Julian F.; Rigobon, Roberto. “Aggregate Confusion: The Divergence of ESG Ratings.” Review of Finance 26(6), 2022.
2. Morgan Stanley Institute for Sustainable Investing. Sustainable Reality 2025 (Morningstar-based data; sustainable-fund assets and performance statistics through June 2025).
3. Morgan Stanley. Sustainable Signals: Individual Investors 2025.
4. Morgan Stanley. Sustainable Signals: Corporates 2025.
5. International Energy Agency. World Energy Investment 2025: Executive Summary (notes “some USD 400 billion is now spent on grids worldwide”). 2026.
6. International Energy Agency. “Global electricity demand is set to grow strongly to 2030, underscoring need for investments in grids and flexibility” (states annual investment in grids will need to rise by 50% by 2030). 2026.
Bruce Kahn, Ph.D., is Lead Portfolio Manager of the Shelton Sustainable Equity Fund.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
