Written in collaboration with

Written in collaboration with

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This article is part of Bain’s 2026 CEO Sustainability Report

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Over the past decade, sustainability investing has undergone a profound transformation. What began as a distinct investment category and portfolio management activity has evolved into something much more fundamental: a determinant of competitive advantage, capital allocation, and long-term enterprise value. Today, many investors weave sustainability into every step of finding, assessing, and managing investments.

Investors now have something they didn’t 10 years ago: evidence that sustainability can create added value when the right conditions align. Certain sustainability investments, such as renewable energy, have dramatically outperformed expectations. Others, including green aluminum and hydrogen fuel cell vehicles, have failed to scale. As a result, some companies created substantial value through decarbonization, while others spent years preparing but fizzled.

This has fundamentally changed the questions investors should ask—both about where to invest next and how to create value in companies they already own.

Sustainability has become a source of competitive advantage

Many observers have concluded that sustainability is in retreat, but sustainability investing is evolving, not disappearing. There have been three distinct waves of investment, each with a different primary source of value creation.

• Wave 1: Sustainability as investment theme (before 2022). Capital flowed into renewable energy; sustainable mobility; clean manufacturing; environmental, social, and governance (ESG) software; and other areas until rising interest rates and a decline in the perceived importance of sustainability shifted investor attention toward profitability and cash generation.
• Wave 2: Sustainability as operational lever (2022 to 2025). Fund flows to sustainability and ESG-labeled funds slowed amid higher interest rates, greenwashing scrutiny, political backlash, and a renewed focus on cash generation. But rather than disappearing from the investment agenda, sustainability moved to the operating plan. Investors increasingly asked how sustainability could improve traditional businesses through lower energy intensity, smarter procurement, circularity, supply chain resilience, decarbonization, and customer access. In this phase, the key question shifted from “Is this company green?” to “How can sustainability improve its cost, risk, revenue, or growth?”
• Wave 3: Sustainability as intrinsic advantage (2025 onward). As diverging transitions reshape certain industries, today’s defining question has become "How can we leverage sustainability-linked disruptions as a source of competitive advantage?"

As a result of this evolution, investors active in these industries are focusing less on sustainability-labeled sectors and more on the sustainability-linked constraints and inflection points reshaping those industries. Access to renewable power, grid capacity, critical materials, water availability, resilient supply chains, and adaptation infrastructure have jumped from niche sustainability topics to constraints determining which companies grow and which cannot.

Although investors are raising fewer sustainability-focused funds, capital is flowing increasingly to companies positioned to create value as sustainability reshapes industry economics (see Figure 1). The share of investments into companies that link AI or data center infrastructure and sustainability (renewable electricity and transmission infrastructure for data centers, for example) more than doubled from 2024 to 2025, according to Bain analysis of PitchBook data.

Figure 1

Global alternative asset manager Brookfield’s acquisition of renewable energy company Neoen illustrates this trend. The investment thesis focused on securing access to one of tomorrow's scarcest industrial inputs: the renewable electricity required to power AI infrastructure.

Investors are similarly looking at ways to invest in a world of increasing physical risk from extreme heat, flooding, wind, storms, and water stress. The business opportunity in helping the world adapt to climate change is large and growing, from about $1 trillion today to an estimated $4.4 trillion by 2050, according to research by Bain and GIC. Lightsmith Group, a growth equity fund focused on resilience and adaptation, invests in businesses whose value proposition strengthens as climate disruption increases. One example: AiDash, which uses satellite imagery and AI to help utilities reduce outages, manage vegetation, and respond better to climate-related risks. Its focus is on helping clients anticipate and manage physical climate risks, not simply reduce emissions.

Such investment opportunities can be found across a variety of sectors as companies and value chains adapt to new environmental hazards. And only some of this additional business potential is priced into current valuations.

Importantly, these investments don’t depend on sustainability labels. They focus on structural constraints that investors believe will become increasingly valuable over time.

Concentrated ownership creates an execution advantage

Just as investors have updated how they select their holdings, they have also redefined the way they create value in their portfolio companies. Decarbonization has shifted from being primarily a compliance exercise to an increasingly important driver of operational performance and resilience, with implications for long-term enterprise value. Today, the relevant question is, "How do I help my portfolio companies decarbonize in ways that create long-term value?"

Companies have made significant progress in decarbonization over the past five years (see Figure 2). Across a sample of more than 700 PE-backed, privately owned, and public companies reporting through CDP, almost half are now committed to and delivering on a science-based net-zero decarbonization plan as defined by the Private Markets Decarbonization Roadmap (PMDR).

Figure 2

Overall, emissions have improved materially (see Figure 3).

Figure 3

Companies with concentrated ownership (meaning they are private, PE-owned, or have a large individual shareholder) are further along than widely held public companies. Despite being roughly half the size by revenue, 53% of companies with concentrated ownership in our universe have reached the more advanced “aligning” or “aligned” stages, compared with 38% of widely held public companies.

Analysis of CDP’s Net-Zero Alignment Dataset also shows that private companies, on average, have more ambitious targets across Scopes 1, 2, and 3. The quality of reported emissions figures of private companies is higher, and targets are, on average, more credible, with a clear time-bound action plan defining how a company will achieve its targets.

One possible explanation is that while public ownership provides valuable market discipline and transparency, concentrated ownership may make it easier to prioritize operational investments whose value unfolds over many years and balance those with other priorities. Some long-term-oriented investors such as La Caisse (formerly CDPQ), the Canadian pension fund, see supporting portfolio company decarbonization and the transition to more sustainable business models as part of their fiduciary duty. Other pension and sovereign investors, including CalPERS, Mubadala, GIC, and Temasek, argue that investing in companies with strong sustainability practices and backing businesses positioned to benefit from sustainability-driven market shifts will drive long-term returns and strengthen portfolio resilience.

Although buyout holding periods are typically only five to seven years, private equity investors must constantly evaluate what the business will look like for the next buyer. Questions about physical climate risk, resource scarcity, insurance availability, future regulation, and customer requirements increasingly become questions about future enterprise value. As one chief sustainability officer of a European private equity fund described it: "You don't want to end up holding an asset for seven years with nobody to buy it at the end."

KKR's investment in CoolIT illustrates how sustainability can strengthen a company's strategic value proposition. CoolIT's liquid-cooling technology significantly reduces the energy and water required to cool data centers while lowering operating costs for customers. As demand for AI infrastructure accelerated, these sustainability-linked advantages became a key source of commercial differentiation, helping KKR exit with a 15 times return on its investment.

Climate risk action and policy engagement have become competitive differentiators

Bain and CDP analyzed the key characteristics of leading decarbonizers during two time periods: 2021 to 2023 and 2023 to 2025. During both periods, leading companies:

• combined decarbonization and value creation;
• set ambitious science-based targets;
• held operational leaders accountable for decarbonization; and
• collaborated across the value chain.

More recently, two new capabilities increasingly distinguish the leaders: acting on climate risk and policy engagement.

Between 2021 and 2023, simply identifying climate-related physical and transition risks strongly differentiated leading companies. Today it no longer does. More than 96% of companies in our sample now recognize acute and chronic physical risks as relevant and include them in their risk management process. Almost all do so for transition risks such as market, regulatory, and reputational risks. The differentiator has shifted from identifying these risks to acting on them.

Today, fewer than 70% of companies can articulate the financial impact of the climate risks they face, and only 35% of the world’s 1,200 largest listed companies have disclosed an adaptation plan. But well-designed adaptation investments generate substantial business value, returning a median of $10 for every dollar invested in responding to physical climate risk, according to CDP. 

The benefit to investors is illustrated by a real estate investor’s experience analyzing physical and transition risks across its portfolio and determining which high-risk properties required retrofitting or resilience investment and which were candidates for selective divestment. The effort increased net operating income through higher rents, lower energy consumption, and reduced insurance costs. The exit multiple of modernized and efficient buildings also increased.

Leading investors sometimes extend this approach beyond individual assets to entire value chains. After assessing climate vulnerabilities in its wheat and tomato supply chain, one PE-backed food manufacturer strengthened the resilience of its supply by increasing its local sourcing of ingredients and incentivizing farmers to improve their water efficiency and soil health.

Policy engagement, another differentiator, entails understanding how emerging regulation will reshape industry economics and positioning investments in anticipation of those changes. Companies that engaged with governments directly or via trade associations on carbon pricing, taxation, and subsidies reduced emissions intensity almost four times faster than companies that remained passive (see Figure 4).

Figure 4

Consider the competitive advantage that comes from acting before competitors do. US-based energy transition investor Energy Capital Partners' 2023 take-private of UK recycling company Biffa illustrates the investment opportunity. The acquisition was underpinned by strong UK circular economy regulation, including higher recycling targets and extended producer responsibility, which increased confidence in long-term demand and made the asset more attractive.

Building long-term advantage

Investors have learned a lot through the waves of sustainable investing. First, that sustainability increasingly creates value where it reshapes industry economics and competitive advantage. Second, concentrated ownership can be a structural advantage in executing long-term operational transformation. Third, leadership increasingly comes not from monitoring climate risks and policy developments but from turning them into competitive advantage.

Leading investors allocate capital to businesses positioned to benefit from sustainability-linked disruptions and build operational value inside their portfolio companies by strengthening resilience, accelerating decarbonization, and acting before competitors.

Once a separate investment strategy, today sustainability is an important lens for understanding long-term competitive advantage.

• Acknowledgments

  For their contributions to this report, the leadership team of Bain & Company's Global Sustainability & Responsibility practice would like to thank the following people: Tiziano Abdelsalhin, Yasmin Abuomar, Saksham Agarwal, Rahul Baid, Ed Beech, Rudraksh Bhandari, Naresh Bhansali, Madhuri Bhatt, Sasha Boldyrev, Jan Budde, Nanette Byrnes, Sonal Chawla, Jeongsoo Choi, Mehuli Das, Jenny Davis-Peccoud, Silvia del Río, Grant Dougans, Katherine Duceman, Aayush Gupta, Mridul Gupta, Tanishk Gupta, Dale Hardcastle, Cate Hight, Himanshu Hooda, Vaibhav Jain, Paul Judge, Anurit Kanti, Aadya Kanupriya, Sachin Kotak, Ann Lee, Emily Leinbach, Sonila Lesko, Torsten Lichtenau, Gosia Mikołajczyk, Martha Moreau, Dayle Nel, Preeti P, Hye Lim Park, Samyak Ponangi, Aravind Raj S, Anushri Ranganathan, Raghav Sethi, Ron Sharan, Aditya Sharma, Chirag Shenoy, Siya Sindhani, Rajat Pratap Singh, Sankshep Singh, Himadri Suri, Prabuddh Vaidya, Valentina Vellinho Nardin, Subodhika Vohra, Devesh Wadhwa, Soegeng Wibowo, Swati Yadav, and the Editorial team.

  “The New Investment Playbook for Sustainability” was written in collaboration with CDP.

Read our 2026 CEO Sustainability Report

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About CDP

CDP is a global non-profit that runs the world’s only independent environmental disclosure system. As the founder of environmental reporting, we believe in transparency and the power of data to drive change. Partnering with leaders in enterprise, capital, policy and science, we surface the information needed to enable Earth-positive decisions. We helped more than 22,100 companies and over 1,000 cities, states and regions disclose their environmental impacts in 2025. Financial institutions with more than a quarter of the world’s institutional assets use CDP data to help inform investment and lending decisions. Aligned with the ISSB’s climate standard, IFRS S2, as its foundational baseline, CDP integrates best-practice reporting standards and frameworks in one place. Our team is truly global, united by our shared desire to build a world where people, planet and profit are truly balanced. Visit CDP.net or follow us @CDP to find out more.