How 'ESG fatigue' signals need for new approaches to solve climate crisis

As COP29 comes to a close in Baku, President-elect Donald Trump’s recent vow to pull the US out of the Paris climate agreement yet again has cast a shadow over global climate efforts. While perhaps unsurprising, this disappointing outcome underscores how our dependence on politics alone to solve the climate crisis is an exercise in futility.

In the last three decades, emissions have continued to rise, the climate is edging toward uncontrollability, and progress on the Sustainable Development Goals (SDGs) is faltering, with recent data revealing that 35 per cent of targets are stagnating or even backsliding.

Meanwhile, the financial gap to achieve the SDGs has ballooned to USD 4.5 trillion per year — a 60 per cent increase on the amount estimated in 2014 when the SDGs were launched.

This daunting picture highlights an inconvenient truth — negotiations driven by governments have failed to solve global challenges, and the world cannot wait another four years to mitigate the climate crisis.

Rising geopolitical tensions in the Middle East further complicate multilateral efforts, and even the sustainable finance sector faces critical doubts. Once heralded as the future of responsible investing, ESG — also known as environmental, social, and governance — funds are waning in popularity. Since 2021, global investment into ESG funds have shrunk, dipping into negative territory in late 2023 — a trend fuelled by investor skepticism about the true impact of so-called sustainable investments.

This emerging “ESG fatigue” among investors signals that new approaches are urgently needed. To make meaningful progress, the focus must pivot toward a model that can channel substantial private capital into impactful projects in regions most in need to catch up, such as the Middle East, Africa, and Southern Asia (MEASA).

While the MEASA region is struggling to make progress in this field, it also happens to have the highest economic growth potential. The UAE's access to emerging markets in the MEASA region positions it uniquely to channel investment and foster transformative growth opportunities. This unique combination of factors allows for what is being termed as transition investment, a philosophy which is aimed at achieving socio-economic impact along with financial returns by capitalising on emerging markets.

And there is definitely demand. To launch our latest report, the Transition Investment Lab at Stern at NYU Abu Dhabi gathered representatives from global sovereign wealth funds, financial institutions, and development banks who collectively manage some $1.2 trillion.

Their feedback was simple — there's an appetite for transition investment and this market transforms the narrative on some of the world’s most pressing concerns. More than just a new label in sustainable finance, transition investment offers a proactive, forward-looking approach to risk management, addressing hidden liabilities that could pose long-term threats to investors’ portfolios.

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