When sustainability becomes a liability, we need a rethink

Christopher Gasson looks at what the outflow from sustainability-themed funds mean for the broader water economy as global temperatures rise.

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We lost the sustainability premium last year. For more than a decade until 2025, cash flowed into sustainability-themed investments. Last year the flow reversed. There was an $84 billion net outflow from sustainability-themed funds according to Morningstar, an investment platform which has been reporting on sustainability flows since 2018. It may partially explain the underperformance of water-related stocks in 2025 (the GWI Global Water Index rose by 2.65% while the benchmark MSCI World Index rose by 21.6%), but the implications are much broader than that.

Between 2018 and 2024, $1.28 trillion flowed into sustainability-themed funds. Interest in the sustainability theme peaked in 2021 with inflows of $645 billion. It created an industry around marketing and reporting corporate environmental impacts that more than paid for itself. Businesses could hire NGOs to undertake sustainability projects with little regard to their immediate return on capital in the knowledge that the greener a company looked, the larger the share of the capital flowing into the sustainability theme they could secure. In 2025 that process went into reverse. Businesses which burnished their sustainability credentials faced an $84 billion headwind compared to those that didn’t.

The problem is that the climate didn’t get the memo. Between 2018 and 2025, average global temperatures rose from +1.2°C to +1.5°C over the pre-industrial norm. The most significant impact of these rising temperatures is on the water cycle, which has become more violent and more extreme. The combination of money out and water risk in means that businesses must rethink their water stewardship strategies. Specifically:

• From marketing to the bottom line. Hitherto, water stewardship has been largely a branding issue aimed at protecting reputational risk around water use and maintaining a licence to operate. Stewardship projects need not lead to any direct operational benefit to the company sponsoring them. That is going to change. Stewardship will need to become much more self-interested in order to maintain shareholder support. Specifically, it will have to deliver a tangible improvement in water security.

• From NGO partnerships to working public water agencies. In a world where water stewardship was an extension of the marketing department, renting an NGO brand (such as the World Wildlife Fund or The Nature Conservancy) is a solid way of reducing reputational risk. The world of water security is different. It is about managing physical water risks, and the best way of doing that is in partnership with the public water agencies. They are the ones who ultimately control the water resources, and there are so many ways in which collaboration delivers a win-win outcome. In contrast, if a business protects itself from a severe drought or an extreme flood while the community around it suffers, it doesn’t get security. It gets conflict. The downside can be even greater.

• From cost centre to innovation centre. In any situation where the challenges are growing but the money is shrinking, there is a choice: death or innovation. There are technological solutions to many of the water security challenges businesses are facing. By making the pursuit of this innovation a core part of the water stewardship responsibility, they can save their jobs and create shareholder value.

Altogether, this transition is an important way in which the global economy will continue to find growth in a world increasingly beset by the intense extremes of the water cycle. Delivering this vision is very much the agenda of our Corporate Water Leaders Group which will meet at the Global Water Summit in Madrid on 18-20 May. I hope that it will also help ensure that the GWI Water Index has a better year in 2026.

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MONEY OUT, TEMPERATURES UP

Interest in sustainability funds peaked during COVID, but the theme was losing traction with investors even before the re-election of Donald Trump. Meanwhile, temperatures remain high. 2025 might have been down on 2024, but last year was a La Niña (ocean cooling) year, while 2024 was an El Niño (ocean warming) year.