Podcast: Why Wall Street Slowed Its Roll on Sustainability

This was seemingly the premise of ESG—Environmental, Social, and Governance—a mode of investing that scored companies on measures of sustainability. Boosters had hoped it would be the beginning a new normal in the investment space, incentivizing corporate behaviors that would ultimately build the climate economy.

This episode, we learn why it’s hard to put a price on “green.”

Podcast Transcript  

Laura PAVIN: Building the green economy means making a lot of long-term bets—funding ideas, and tech, and processes that might not pay off for a while; rebuilding the energy grid; reinventing how we make steel and cement. These are the kinds of bets that don’t pay off on anyone’s quarterly earnings call.  

And that kind of patient capital has to come from somewhere. The biggest pool of it, the one that sets the tone for everything else, is the stock market. The problem, though, is that the stock market isn’t really built for that.  

This has, historically, turned a certain kind of person off to investing entirely. Like Rob. 

Rob MITCHUM:  My dad was always encouraging me to invest in the stock market, but I pretty much just did the abstracted, like, contribute to my 401k and not worry about it—because it felt a little bit gross to me: investing in companies, some of which maybe don’t align with my values; they may be environmentally unfriendly or doing unethical business practices, things that I didn’t wanna support with my money in any direct way. And so I just kind of kept it at arm’s length. 

PAVIN: That’s Rob Mitchum, editor in chief of Kellogg Insight. He knew enough to be uncomfortable, but not enough to do anything about it. Then, around 2020, he discovered something called ESG—an acronym for Environmental, Social, and Governance. It was a different strand of investing.  

MITCHUM: I’m like, this is great. ESG funds, this is what I’ve been looking for. It’s a way to invest without feeling slimy about it. 

PAVIN: It felt like ESG was his way in. Finally, money doing something patient and responsible.  

MITCHUM: The more I looked at it, the weirder I felt about how they were defining the criteria of ESG. It seemed very opaque, like, it wasn’t really clear to me how they were measuring that a company had a high environmental score, for instance. And what really triggered this for me is, I was looking at the stocks that were inside these funds, and the one that really popped out to me, because it was in even the top 10 of the stocks that they were holding, was Exxon. If Exxon is considered to have a high environmental score by these funds, then what does it even mean to have a high environmental score? 

PAVIN: You’re listening to Insight Unpacked: Can We Build the Green Economy? On this episode: investing. There’s this school of thought that we can have our cake and eat it too; that by being strategic about where we put our investment dollars, we can incentivize companies to do right by the environment and make money on them all the while.  

Today, we look at two different angles of this investing ethos: ESG and activist investing. Both showed glimmers of hope and, as you’ll hear, both ran into some problems—problems that call into question their whole premise: that you can put a price on values. We’ll hear about the rise and fall of both strategies from people on the inside.  

But, importantly, their failure doesn’t mean all hope is lost. There was one clever financial structure, tried years ago, that paid off for everyone involved: the investors, the companies, and, well, the environment. And that, my friend, is the story of wind and solar.  

Its success tells us what might need to be true for capital to move at scale on the climate.  

We hear about all of that next.  

... 

PAVIN: The story of why ESG failed is, in many ways, a story about an old problem with the entire architecture of our public markets.  

It’s an architecture that unfortunately mirrors its maker.  

Jeff GITTERMAN: Neurologically, human beings are wired for a punch in the face. 

PAVIN: It’s a problem Jeff Gitterman often thinks about.  

GITTERMAN: We’re wired to see that punch coming and react. We’re not wired for slow-moving crises. 

PAVIN: If we were wired that way, maybe businesses wouldn’t be on the hamster wheel they’re on now: pursuing growth quarter after quarter, seemingly at all costs. Like the health of the planet. 

Gitterman is a wealth manager, by the way. His clients are largely college professors investing for retirement. Long-term thinking.  

He came up believing that the stock market’s purpose was something specific and limited. 

GITTERMAN: The whole concept to me was we were supposed to be able to fund good ideas through the capital markets and that the capital markets were a place where businesses could go that wanted to launch big ideas. The secondary, later intent was a place where people could go and invest money over the long term and create a nest egg so if they couldn’t work or they would retire, they would have money to live off of. 

PAVIN: The stock market was a place to fund good ideas, and a place for ordinary people to grow savings over time. Addressing climate change seemed like it might fit right into that version of the stock market. But over time, he noticed that the stock market shifted into this thing, where you go there to make money. Stat. And then, a crisis struck that made Gitterman really doubt that markets had long-term risk in mind.  

MORTGAGE CRISIS CLIP 1:  Lehman Brothers is going bankrupt. Employees of America’s fourth-largest investment bank saw the writing on the wall late Sunday after talks to pull them back from the abyss collapsed 

MORTGAGE CRISIS CLIP 2: Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. 

MORTGAGE CRISIS CLIP 3:The stock market suffered one of its worst days in years. The Dow Jones Industrial Average plunged more than 490 points. It is the sixth-largest point drop ever, and there were showings since the aftermath....”

PAVIN: In 2008, the mortgage market collapses. Banks had been writing loans to people who couldn’t afford them, packaging those loans into financial products, and selling them off as fast as they could—pocketing their fees and passing the risk down the chain. Nobody was on the hook for what happened next. The incentive was to close deals today, not worry about whether they’d hold up in ten years. 

Gitterman had hoped the market would self-correct and build in consequences for this kind of can-kicking. But he didn’t see that happen. The banks got bailed out. Which told him something crucial.  

GITTERMAN: I can’t have a belief that the system will take care of itself and self-regulate itself. I already know that’s not true. 

PAVIN: That lesson stuck.  

By 2014, Gitterman starts seeing the same pattern form around climate. He’d been talking to the people in the mortgage cinematic universe—reinsurers, credit agencies, bond houses—and what he found was that serious financial institutions were already quietly factoring climate risk into their models. Coastal properties backed by 30-year mortgages were starting to look like a very bad bet. They just weren’t saying it out loud. 

GITTERMAN: The noise was there if you went looking for it. But then what you could see is there was nothing being done about it. 

PAVIN: Sound familiar? So Gitterman starts advising his clients accordingly. And one of the tools he uses is ESG.  

GITTERMAN: The important thing to know about ESG is that ESG is outward looking in measurement. So it’s looking at a company and seeing how environmental regulations are impacting that company, how social changes are impacting that company. 

PAVIN: Again, ESG is an acronym for Environmental, Social, and Governance.  

The E: Is this company facing environmental lawsuits or regulatory exposure that could hurt it down the line? The S: How do companies treat their employees and their local community? The G: Is the board actually holding management accountable, or is it a rubber stamp? It was really about taking the long view.  

And, to Gitterman, it was really useful information. 

But, over time, big financial companies—like BlackRock, Vanguard, State Street—they saw what felt like a business opportunity in ESG, saw the appetite from people like my editor in chief Rob to feel less icky about their investments, and turned ESG into an overarching statement about values. A moral report card.  

GITTERMAN: Everyone came out with a product, and by 2016, ’17, everybody had an ESG fund. It wasn’t the right framework for us to look at whether a company was having a positive or negative impact on climate change. That’s not what ESG does. It’s not a values decider; it’s a value tool. 

PAVIN: It felt rushed, like they were capitalizing on a trend for short-term gain.  

Eventually, that branding is what burned it.  

The backlash, when it came, was swift. Legal challenges from conservative state attorneys general. Billions pulled from major asset managers. And by 2022, the ESG label had effectively become toxic—a casualty of being oversold as something it was never designed to be. 

And so, ESG is not at the forefront of investment strategies anymore, at least not in the U.S. But Gitterman says the concept is still around.  

GITTERMAN:  ESG data is still being bought and used by most large asset managers. It just became what I said at the beginning it should have been: it should have been in the compliance folder. What’s your compliance look like? It looks like this. We do all these things around compliance and we look at all this data over here under compliance as well. We look at E and S and G and that’s how we do compliance about stocks and companies that we purchase.  

... 

PAVIN: It’s true that the hunger for sustainable investing is still there. Despite the fact that 91 ESG funds shut down in 2025. In that same year, the total assets invested in sustainable funds actually went up.  

Some of the biggest investment groups on the planet are still pushing for this.  

Aaron YOON: The Norwegian sovereign wealth fund, Japanese government pension fund, GICs of Singapore are like, “hey, we’re long-term holders of the whole capital market. So we would like this capital market system to be sustainable.”  

PAVIN: That’s Aaron Yoon, an accounting professor at Kellogg, and one of the foremost experts on ESG.  

And these pension and wealth funds ... they care about the long-term financial outlook of their citizens, obviously. And what’s more long-term than sustainability? So that’s something working in ESG’s favor.  

But the problem here is in the execution.  

Crucially, these big wealth and pension funds, if you don’t know, they don’t actually manage money directly. They hire and rely on asset managers to do it for them.  

Which means these wealth and pension funds are taking their money over to asset managers and saying, “hey, asset managers, allocate this money to firms that engage in ESG activities. Please and thank you.”  

Well, there’s a problem in that handoff. 

YOON: There’s very little follow through of these funds actually incorporating ESG.  Some firm managers and asset managers, as well, still view environmental activities as a sort of charitable activity that is not an investment. They’re not viewing it as an investment.  

PAVIN: The pension and wealth funds see it as an investment, while the asset managers who are supposed to invest the money on the funds’ behalf, they see it as more of a charity.  

But why is there that mindset gap?  

YOON: There is this definition and measurement problem in ESG. There’s no doubt—everything under heaven could be ESG, and that’s sort of the typical criticism. 

PAVIN: What counts as ESG, it’s a little confusing. This is especially clear when you look at how ESG affects what companies invest in. Yoon actually looked at this, and what he found was pretty sobering.  

YOON: Firms are choosing projects that are very short-term payback, and half of that is actually LED light bulbs. 

PAVIN: When you have no standardized measurement, companies do the bare minimum—the cheapest, fastest thing that lets them say they’re doing something: LED lightbulbs. Not carbon capture. The thing that will let them check off a box to survive another day.  

… 

PAVIN: The way Yoon thinks about it, ESG’s sloppy application, it’s not an indictment of the whole idea behind it; it just needs some refining. Because, as of right now, he says that even when you look at something as seemingly straightforward as direct carbon emissions—they have different definitions. Measuring it is still in the baby steps.  

YOON: Defining it, putting into a system where we can monitor it properly and incentivize different parties properly—I think that’s sort of the world that we will  move towards. 

PAVIN: But we’re not there yet. And without it, ESG is more of a label than a lever. 

But the problem ESG was trying to solve—that public markets won’t naturally reward long-term thinking—that problem didn’t go away. And ESG wasn’t the only approach to solving it.  

... 

PAVIN: There was another approach to financing the green economy. And it came from Jeff Ubben. For years, Ubben was an investor on Wall Street, managing billions for huge firms like Fidelity and Blum Capital. But it was while he was there that he took issue with something. 

You see, traditionally, when a company is underperforming or not running itself well, investors can just dump the stock. This was a bee in Ubben’s bonnet. 

Jeff UBBEN:  But then you’re not really making the most of the system where you have the owners, you know, that are smart and have a certain value add around how to drive value hold management accountable.  

PAVIN: And so, he became something of an activist investor—but with a social impact purpose. He would buy stakes in companies, get board seats, and push companies to perform from the inside. He did this in a collaborative way, which is in sharp contrast to the Carl Icahn way, where you buy a big stake and use that to force a company to do what you want, waging proxy wars, publicly threatening management to get your way, stuff like that.  

Ubben was taking more of the long view. The climate, over time, started factoring into that. Where he was previously more interested in influencing financial gains, he started thinking about things differently.  

UBBEN: I had a thesis that resiliency would get priced into a stock because climate had reason, in terms of people’s knowledge of the risk to certain businesses, even if it results in more investment today without a return today, I had a thesis that you would get recognized for the resiliency of the asset, especially compared to your competitors. 

PAVIN: In 2020, he launched a new fund called Inclusive Capital, with an explicit focus on environmental and social issues. The bet was that companies who made themselves fit for a lower-carbon future would eventually be rewarded by the market—that this would pay dividends.   

So which companies did he bet on? 

Some of the largest carbon emitters in the world. 

Including Exxon.  

And no, you didn’t hear that wrong.  

A climate-focused activist investor bought his way into Exxon’s boardroom. But the logic actually made sense: if you want to move the needle on emissions, you don’t invest in the companies already doing the right thing. You get inside the ones that aren’t. And you push. 

UBBEN: They have a pretty mature business otherwise with a lot of cash, and they have nowhere necessarily with it to go.  

PAVIN: In other words, Exxon had already kind of maxed out investing in itself. There were only so many places they could reinvest in more oil infrastructure.  Meaning they were sitting on a lot of cash with nowhere compelling to put it. But ... 

UBBEN: But if they can deploy it in lowering their carbon emissions and get paid to do so—or take market share because they’re doing it well—then they have a terminal value that explodes in 2040.  

PAVIN: Exxon had the geological expertise, the industrial scale, thousands of scientists and engineers—everything you’d need to build carbon capture at a size that actually moves the needle. That’s not a job for a scrappy newcomer. That’s a job for the most capable energy-infrastructure company in the world. 

What Exxon didn’t have was a reason to do it. That’s what Ubben thought he could provide.

But Exxon is just one story. To understand where Ubben’s thesis actually got tested—where we can really see the mechanics of what he was trying to do—you have to look at a different company. A fertilizer company. Not glamorous. Not a moonshot. Just a company called OCI that had been making ammonia for decades. 

OCI had the same basic problem Exxon had—a mature commodity business with limited ways to reinvest in itself. You can only build so many fertilizer plants. But unlike emissions from, say, a coal plant—diffuse, hard to capture—OCI’s CO2 came off the process in a concentrated stream, which meant you could catch it before it escaped, put it back in the ground, and, with the IRA, you’d get paid to do it. 

That was the bet. Not asking OCI to become a different kind of company. Just asking it to do something useful with what it was already producing. 

But first, he had to wait. 

UBBEN: The whole time between 2018 and 2022, you’re kind of sitting there saying, “Is society gonna pay for decarbonization?” Waiting, waiting, waiting. 

PAVIN: The Inflation Reduction Act had just passed. The biggest climate investment legislation in U.S. history. Every structural condition seemed right. And OCI was moving—announcing plans for a billion-dollar blue hydrogen project. 

UBBEN: And you know, I was like, “this is it. This is ... the market’s gonna love this because the subsidies give it a good return, and the asset’s gonna be more resilient, and the stock was like unchanged. And then over time, because of the CapEx and the debt that was being put on to build out, the stock was going down. 

PAVIN: The market looked at a long-term bet on technology that might pay off in a decade—in a world where demand for clean energy was still theoretical—and said, that’s not an investment, that’s a risk.  

UBBEN: It was the market’s way of saying this is just extra risk, and resiliency is just way too far out for me to capitalize. 

PAVIN: Ubben wound down Inclusive Capital in 2023. But the argument wasn’t over. Two years later, Exxon—the company whose board he’d been sitting on—quietly shelved a blue hydrogen project on the Gulf Coast. Everything going for it. And it still didn’t pencil. 

UBBEN: Did you hear one thing about it, basically? It was just kind of like, “fine. That was an interesting Roman candle, this whole idea of clean energy.” So we kind of live buzz cycle to buzz cycle because what is the flavor of the day? And it was crypto, then it was ESG, there’s a clean tech adrenaline rush in 2021, and now it’s AI. And I think all of this is a terrible way to allocate capital. 

PAVIN: The problem wasn’t Ubben’s thesis. The problem was the market he was operating in. Public markets are built to price what’s visible, measurable, and near term. A more-resilient Exxon in 2040 is not visible. It’s not measurable. And it is very definitely not near term. 

... 

PAVIN: So no, ESG did not end up funneling large amounts of capital toward renewable energy and decarbonization. And even the most sophisticated, patient, well-positioned activist investor couldn’t move the needle on climate from inside an influential company’s boardroom. 

But it’s not all doom and gloom. 

David CHEN: What’s the risk, what’s the timeframe, and what’s the degree of returns that you can generate ... makes an investment either tangible and attractive, or risky and uncertain. 

PAVIN: David Chen is an adjunct professor of finance at Kellogg, teaching sustainable finance and impact investing. He is also an investor in sustainable finance. At Kellogg, he founded a competition that challenges graduate students to design investment structures that are good for the planet and for returns. He has spent a long time thinking about what it actually takes to get private capital moving on the climate. 

And he says there is precedent for it working. You just have to look at the right example. It might even be sitting right on your roof. Or a field.  

CHEN: In the year 2000, 1, 2, 3, renewables—solar and wind—the economics were ..., it was not that clear that they would be highly profitable. And there was some amount of technology risk. So will it actually generate the kinds of electricity, and wind, and solar results in electricity that we forecasted, from a technology standpoint? 

PAVIN: At the time, solar and wind were not yet operating at scale. We knew we could generate electricity from them. But would they generate enough energy at a cost that would make them competitive? That remained to be seen.  

CHEN: So lots of uncertainty, to put it in a fine point. It was kind of scary. 

PAVIN: Now, there were incentives at the state and federal level to support solar. Which was helpful, if you’re the investor.  

But there was a bit of a problem with how those incentives worked. 

CHEN: Because the government incentive that was being applied to wind and solar were tax incentives—a tax credit. So in other words, it said that if you generate lots of revenue and lots of profit from your renewable-energy project, you’ll get this very, very significant tax credit. 

PAVIN: Seems like a good idea. The government basically said, “hey developers, if  you make a lot of money, we’ll cut you a break on your taxes. Keep some of those taxes you would have paid us for yourself.” That was a real strong incentive.  

The problem with that is that to get a tax credit, well, you have to have something to tax. You know, profits. Solar and wind developers didn’t have that.  

CHEN: Back then, the folks that were taking the risk to develop wind and solar projects—called developers, at the time—didn’t have what is known as a tax appetite. No profits. So the idea of getting a tax credit or reversal of your taxes was like, “that’s kind of nice, but I don’t have any profits, so I don’t pay any taxes.” So the conundrum that the industry had to deal with was, “we’re given this big massive government incentive, and we have no way to use it. It’s effectively valueless.” 

PAVIN: So what could be done? Well, on the other side of this problem sat banks, insurance companies, big manufacturers—corporations with enormous tax bills and every motivation to find legal ways to shrink them. They had what the developers lacked: tax appetite. Lots of it. 

Their lawyers noticed the mismatch, and figured out how to make it work.  

CHEN: In effect, what it says is that investors and the developer are made up of two classes of people: the developer that has no taxable income and there’s nothing to shelter, and investors that may in fact already have, in their current business, lots of profits and therefore lots of quote-unquote tax appetite. So they created a structure that the IRS would approve that allows them to flip. And that is in the early days, the investors that have taxable income can take and effectively buy the credits, or get credit for the credits, and the developer takes none of it. And then at some point in the future, when the investors have fully tapped out the use of the credits and generated their rate of return, again, it’s increasing profits, and therefore it has value, the ownership of the profits and cash flow flips to the developer. 

PAVIN: The government’s incentives finally landed where they could actually do something. This structure became known as a Partnership Flip, or a Tax Equity Flip, and it unlocked the market. 

And because of it, private capital suddenly saw wind and solar as a solid and relatively risk-free investment. And with that huge influx of private capital, solar and wind were able to further mature as an industry and begin to scale. With scale came a reduction in costs—things got more efficient, technology got better and cheaper, and eventually the profits started rolling in. 

It worked. You can look at the installation charts for renewable energy in the U.S. and see the exact moment the tax-equity flip came online—a flat line that suddenly bends upward. Not because of a new technology breakthrough. Not because of a policy mandate. Because a group of lawyers figured out how to make the incentive actually land with the people who could use it. 

That is the proof of concept this episode has been building toward. 

Here’s what happens when the stars align: a technology that’s mature enough to evaluate, a government incentive that’s real but misapplied, and a financial structure clever enough to bridge the gap. Private capital doesn’t need to be convinced to care about climate—it just needs to see a legible risk and a legible return. 

So can we replicate this? Can we create structures that incentivize and reward the decarbonizing of steel and green cement?  

CHEN: The technology is still in development, the regulation is still in development, the way I’m going to score the greenness of my steel is still in development, and the cost curve is in development. And so, is green steel scary right now? Yeah. But you notice, all the ways that I describe it are the same way that I would’ve described solar and wind circa 2004. 

PAVIN: When you get it right and the model works, the private sector can mobilize and move the needle.  As we look forward, most of what we still need to decarbonize is going to need this level of creativity and alignment. The clock is running. And this time, clever lawyers in a room aren’t going to be enough. 

... 

PAVIN: In the time since winding down Inclusive Capital, Jeff Ubben has changed his tune on what’s possible. 

UBBEN: There is no such thing as climate finance. No such thing. Finance is finance. 

PAVIN: Where Ubben’s landed, is that money doesn’t have values. It has math. And for the math to work on climate, someone has to define the terms. Because right now, no one really knows what game they’re playing. What counts as a ton of carbon? What’s the penalty for emitting it? What’s the reward for not? Without answers to those questions, there’s nothing for capital to price—and if there’s nothing to price, capital goes somewhere else. 

That’s what the tax equity flip understood. It didn’t ask investors to care about the climate. It gave them a number, a legible, auditable, bankable number—the tax credit—and let them compete on it. 

When you don’t have that? Well, here’s Jeff Gitterman, again.  

GITTERMAN: You have to think about the risk and return and the fiduciary responsibility to the client ahead of climate change. I can’t put climate change ahead of my fiduciary responsibility to my client. 

PAVIN: That’s not cynicism; that’s the system working exactly as designed. Gitterman, Ubben, Chen—none of them are waiting for investors to grow a conscience. They’re waiting for the rules of the game to change. 

We just need someone to draw the map. And right now, in the United States, we’re still waiting for that to happen.  

On the next episode of Insight Unpacked: What would it actually take for policy to catch up? Can it?  

We’ll get into it!  

[credits]   

PAVIN: This episode of Insight Unpacked was written by Laura Pavin, edited by Rob Mitchum, and produced by Andrew Meriwether and the Kellogg Insight team, which includes Fred Schmalz, Abraham Kim, Maja Kos, and Blake Goble. It was mixed by Andrew Meriwether. Our theme music is by Sam Clapp. Special thanks to Jeff Gitterman, Aaron Yoon, Jeff Ubben, and David Chen. And additional thanks to the Eleven Eleven Foundation for their support. As a reminder, you can find us on iTunes, Spotify, or at kell.gg/unpacked. If you like this show, please leave us a review or rating. That helps new listeners find us.