The 2025 proxy season is the latest sign sustainable investing needs a systemic reset

As proxy season draws to a close, most climate-related shareholder resolutions have once again received tepid support, with vote tallies trending downward. Even modest proposals at high-emitting companies struggled to gain traction, and few directors were held accountable for climate inaction. Meanwhile, ESG investment funds have faced record outflows— another signal of growing investor disillusionment.

Many chalk these trends up to the current political environment— particularly in the US, where “anti-ESG” backlash has led many companies and investors to reverse sustainability commitments or go quiet. Those dynamics are certainly part of the story.

But the problem runs deeper. These trends reflect a growing scepticism that conventional sustainable investing can consistently deliver the long-promised “win-win” of improved sustainability and financial returns. This crisis of confidence should prompt a strategic reset for climate-conscious investors— and proxy season is a pivotal moment to reflect on how shareholder advocacy and other tools must evolve.

A new Sierra Club paper, The Long Term Will Be Decided Now: Why Climate Risk Demands System-Level Action from Investors, lays out a strategic framework centred on mitigating systemic risk through real-world decarbonisation—not just firm-level risk management.

Why conventional ESG approaches fall short

Most ESG and climate-related shareholder votes—and sustainable investing more broadly—focus on managing risks to individual portfolio companies and their ability to maximize profits. But that approach is deficient on two fronts: it fails to address the broader market damage some companies cause—and tackles only a small share of the risk facing diversified portfolios. When it comes to systemic threats like climate change, it’s increasingly clear that ESG-oriented approaches aren’t fit for purpose.

Conventional sustainable investing strategies focus on relative company performance rather than the health of the overall economy. They’re built on traditional investing orthodoxy, but go beyond diversification by incorporating ESG disclosures, portfolio screens, and risk assessments to manage company-specific risks.

Yet, like traditional investing, these approaches mainly focus on exposure to individual firms— not on addressing systemic threats to the broader market. Research shows that 75% to 94% of the variability in diversified portfolio returns is explained by exposure to broad market forces— not by picking outperforming assets. The biggest risk for most investors isn’t the success of particular holdings; it’s the strength of the market overall.

NZI Climate Solutions Summit | 11.09.2025 | London | find out more here

And climate change doesn’t just threaten the profits of individual firms— it threatens the foundations of the entire economy and market stability. According to a recent study, if emissions continue on their current trajectory, global stock values could fall by more than 40%— or over 50% if tipping points are triggered, such as the collapse of the Amazon rainforest or polar ice sheets. Treating climate change as just another firm-level risk misses the far greater financial threat it poses to investors.

This disconnect is especially visible in how shareholder resolutions are largely still framed and evaluated. Most are pitched as efforts to improve a company’s governance or risk management in ways that will boost its financial performance. In the climate realm, that often includes proposals asking companies to disclose emissions or present transition plans. These are important requests. But if shareholders only support a proposal when it’s clear it will boost the company’s returns, the implication is that if the outcome is uncertain, they’ll vote no.

The reality is, most companies already act in their own self-interest. If aggressive climate mitigation maximised each firm’s short-term value, every company would already be doing it. Rather than simply reinforcing that self-interest, investors should be prioritising their own. For the vast majority of investors with long-term diversified portfolios, that means reining in corporate behaviour that undermines the economy’s overall health.

When a resolution urges a high-emitting company to present a credible decarbonisation plan, the litmus test for too many investors is: “Will this maximise the company’s value?” But the more consequential question is: “Will this reduce systemic risk and strengthen long-term portfolio performance?”

Many investors are understandably sceptical that climate action will boost every company’s fortunes. But even from a purely financial standpoint, that shouldn’t be their standard. The greatest risks to diversified portfolios are systemic and un-diversifiable. Even if climate action requires trade-offs for some firms, most investors’ financial imperative depends on the health of the market.

Evolving investor strategies to address systemic risk

That’s the core case for system-level investing, which starts from the recognition that investors cannot protect long-term value without supporting the systems their portfolios depend on. In the face of systemic climate risk, that means prioritising real-world emissions reductions over portfolio decarbonisation.

When it comes to proxy voting and shareholder advocacy, investors should push companies—particularly major emitters—to align their plans and spending with what climate science demands. That means going beyond calls for transparency to demand accountability for systemic impact. Disclosure alone won’t cut emissions or protect portfolios.

But system-level investing isn’t just about stronger stewardship. It also requires activating other key levers: capital allocation, policy advocacy, and service-provider accountability.

Capital allocation strategies should focus on where investors have the most leverage: in primary markets, where companies raise new funds for operations and growth. Most new capital is raised through debt, especially in high-emitting sectors like fossil fuels and utilities. Because debt is time-bound and recurring, companies must return to the market regularly, giving investors frequent leverage. Restricting financing to polluters without credible transition plans, while scaling investment in climate solutions, can reduce emissions and systemic risk. In comparison, trading existing stocks or bonds in secondary markets has little effect on a company’s capital or behaviour.

Policy advocacy is also essential, especially as government action lags and corporate influence continues to obstruct progress. Systemic risk cannot be adequately contained without structural reforms and robust regulation to accelerate economy-wide decarbonization. Investors have a responsibility to support strong climate mitigation policies— and to hold companies and trade associations accountable when they undermine them. This isn’t about partisan politics; it’s about protecting the economy that underpins long-term portfolio value.

Lastly, asset owners must hold their service providers to account. If asset managers, proxy advisors, or consultants aren’t taking steps to mitigate systemic risk, asset owners must update their mandates—or reallocate their capital. Without oversight, too many intermediaries will continue treating climate only as a company-specific risk, rather than a systemic threat.

From corporate risk management to systemic risk mitigation

These strategies don’t mean abandoning firm-level risk management. But they do require recognising that long-term portfolio value depends less on maximising each company’s growth and more on reducing the systemic threats that jeopardise the entire market. Investors must use their influence to tackle the problem itself, not just try to manage exposure to it.

These shifts aren't about ideology or altruism. They’re about investors’ fiduciary duty, which can’t be fulfilled without addressing systemic risks. Climate action isn’t peripheral, it’s central to economic stability and long-term portfolio value. Perpetuating a financial system that defers to corporate self-interest over global prosperity and resilience is no longer tenable.

Investors must stop treating climate change just as a risk to manage— and start working to mitigate it. Protecting the health of the economy from climate breakdown is in most investors’ best interest, even when it conflicts with some companies’ short-term incentives. It’s time for more investors to confront that reality— and act accordingly.