Changing Tides in the Financial World: The Rising Risk of Ignoring Sustainability
Insights Bob Dylan Could Offer Modern Institutional Investors
Bob Dylan's words from decades past echo in today's financial world: "the times they are a-changin." As political mismatch in the United States surfaces as a substantial investment risk, investors and businesses are increasingly disregarding it at their own peril. Let's explore the hidden costs of neglecting sustainability and why many are underestimating it.
Keep Up with the Times, or Sink Like a Stone
The significance of various factors that matter to investors fluctuates over time, a concept known as dynamic materiality. Research has shown cyclical trends, for example, during upturns, strong employee relations lower new issue bond yields, possibly because robust employee relations aid in recruiting and retaining top talent. However, corporate social responsibility activities, as a proxy for social capital, show no correlation with bond spreads during expansions [1].
In times of accelerated change, sustainability issues become increasingly material. For instance, the acute changes triggered by the COVID-19 pandemic increased the significance of various social issues related to the pandemic, such as access and affordability, customer privacy, data security, employee health and safety, labor practices, and product quality and safety between January and June 2020 [2].
Today's rapid legal and regulatory shifts are causing trouble. By June 22, 2025, President Donald Trump signed an unprecedented 165 executive orders his first year in office – the most since President Franklin D. Roosevelt signed 568 executive orders in 1933. Additionally, there have been 83 anti-DEI (Diversity, Equity, and Inclusion) and 56 anti-ESG (ex-DEI) lawsuits, further escalating the abrupt legal and regulatory shift [2].
The Peril of Political Misalignment
Since 2023, these anti-DEI and anti-ESG lawsuits have resulted in hundreds of millions of dollars in legal and settlement costs. This explicit cost is on top of the intangible costs of management distraction during lawsuits [2]. Consequently, political misalignment in the United States is becoming a material investment risk, prompting investors and companies to adopt more cautious public-facing language.
Given the ease of revising language compared to reversing initiatives or altering values, many investors and businesses are more sustainable than their disclosure indicates. This novel phenomenon, without a clear frontrunner name among contenders like green-hushing, red-washing, and MAGA-washing, is a focus of academic research by sustainable investing legal expert, Deborah Burand [2].
Outrunning the Current: Is Avoidance Worth the Cost?
Research demonstrates that firms under pressure to enhance their environmental performance diminish their social status by committing more compliance violations relating to employment, healthcare, workplace safety, and consumer protection [3]. Although there is no peer-reviewed research linking pressure to minimize political misalignment with committing more violations of fiduciary duty or mission duty, this remains an area to monitor for those with long-term value creation or mission alignment tied to sustainability.
Neglecting sustainability may also harm trust with employees, investors, and other clients who struggle to comprehend why businesses proclaiming their commitment to sustainability in 2021, 2022, and even 2023 could walk back their promises so swiftly. Consequences include losing talent, assets, and revenues, which can hinder long-term value creation [4].
The harm goes beyond the organizations participating. Settling with the Trump administration has weakened basic protections, and the Gates Foundation's retreat from its scholarship for racial and ethnic minorities added challenges for other investors and businesses pursuing sustainability [4].
Choosing to Swim
Instead of choosing to ignore or downplay their sustainability, investors and companies might opt to develop resilience to endure the legal and regulatory risks associated with maintaining their sustainability narrative. By forming communities of practice to share best practices and lessons learned with similar institutions, investing time in comparative discussions with peers, or other collaborative initiatives, they can work together to navigate the changing landscape [5].
It's time for these investors and companies to heed Dylan's words and "admit that the waters...have grown...and start swimmin' or [they]'ll sink like a stone for the times the are a-changin."
Enrichment Data:
Overall:
- Political misalignment significantly increases investment risk by eroding the progress and credibility of sustainability initiatives, giving rise to the practice of "green-hushing," where companies and investors intentionally underreport or downplay their sustainability activities.
Impact of Political Misalignment on Investment Risk:
- Decreased scaling and effectiveness of impact investments [1]
- Increased physical climate risks and volatility [2]
- Political backlash and regulatory retreat [5]
Emergence and Effects of Green-Hushing:
- Definition and drivers [5]
- Consequences [5]
Summary:
- Transition risks are underestimated due to stalled policies.
- Physical climate risks increase and become more financially damaging.
- Investors face greater uncertainty amid political backlash and regulatory rollbacks.
- The intentional downplaying of sustainability efforts (green-hushing) obscures essential risk information and compromise the effectiveness of sustainable finance.
[1] Source: Truvalue Labs (now part of FactSet) study of dynamic materiality[2] Source: Study of COVID-19 related social issues by Truvalue Labs[3] Source: Research by Arshia Farzamfar, Pouyan Foroughi, Lilian Ng, and Linyang Yu[4] Source: Account of lawyer resignations, Akademiker terminating a partnership with State Street, and companies facing boycotts after rolling back DEI initiatives[5] Source: Study of political misalignment on environmental governance by Yale School of Management's Millstein Center for Corporate Governance and Performance
- In the rapidly evolving financial world, political misalignment is becoming a significant investment risk, as demonstrated by the increasing number of anti-DEI and anti-ESG lawsuits that have resulted in substantial legal and settlement costs.
- This political misalignment is causing concern for investors and businesses, prompting many to adopt more cautious public-facing language, although they might be more focused on sustainability than their disclosure indicates, a phenomenon currently under academic research.
- As a result of neglecting sustainability, businesses may face consequences such as losing talent, assets, and revenues, which can hinder long-term value creation, and may also cause broader societal harm, such as the weakening of basic protections and the added challenges for other investors and businesses pursuing sustainability.
