Impact Investing on the Stock Market? Think again.

Can a stock market investment actually help drive the sustainability transition?

If they’re not (yet) lucky enough to own real estate, the stock market is probably how most people would want to invest their savings. They would either buy stocks in specific companies, invest in a fund sold to them by their bank or, more likely these days, buy into an ETF. See here to learn the difference between the three.

The same goes for Sustainable Investing. Keen for new sources of revenue during times when interests are low, many banks actively promote sustainable/green/responsible/[insert term that makes you feel good] funds. The banks actively manage most of these funds. This means they employ a fund manager who selects which stocks to include and when to buy or sell them.

Greenwashing? Yes, but not as bad as it used to be

When I started this blog (see my post “How to buy stocks without wrecking the planet”), greenwashing abounded. Many “green” funds did little more than use “exclusion criteria” to remove the most controversial companies from their funds, such as weapons manufacturers or tobacco companies. Others went further, using the Best-in-Class approach by investing in only the most sustainable five companies in each industry. Unfortunately, this still meant that a fund labelled as “sustainable” can include companies that are terrible for the planet or society. For instance, European oil companies may be less dirty than their American counterparts and invest more in renewables, so they might be included in a Best-in-Class fund. But their business model is still based on the extraction and sale of fossil fuels.

Over time, the competition for sustainability-minded customers and their fees intensified – and regulators started to strenghten rules against greenwashing. To stay in the game, banks and other investment providers began to refine their selection processes. By using better data, they added more exclusion criteria, such as negative media coverage due to misbehaviour or revenue coming from fossil fuel activities.

Some funds are now taking the opposite approach: Positive Screening. These invest only in companies that DO tick some boxes. That’s why today you can find funds that only contain companies that align with the Paris climate agreement. Others, so-called thematic funds focus exclusively on businesses in a certain sector, such as sustainable water use.

But the real question is: How do these funds actually drive the transition to a sustainable economy?

Short answer: they usually don’t. The reason for this lies in what a stock is and what it isn’t.

What buying a stock means…

Buying stocks in a company means you own a small part of it and therefore

• are entitled to a share of its profits (the dividends)
• have voting rights on certain key decisions, such as board appointments

There are also some other rights, but these are less important here.

…and what it doesn’t

Crucially, when you buy a stock you almost always buy it from someone else who wants to sell it. The company you’re investing in may have issued the share many years ago to raise capital to fund its growth. But apart from these rather rare events, the company gains not a single cent from you buying their stock. Even if you buy shares in the greenest of all companies, it will therefore not help them in any way.

This is a key difference between “Sustainable Investing” through traditional means, and “Impact Investing”, which is mostly limited to alternative, more niche investment opportunities. Impact investments ensure that the flow of money actually makes a difference. This could be funding the construction of a new solar plant or EV charging stations. But that’s not what happens when buying shares on the stock market.

The company gains not a single cent from you buying their stock. It will not help them in any way.

Exceptions: when stocks can actually make a difference

There are a few exceptions that prove the rule, so let’s look into them.

Buying shares in a company when it is raising capital

This is the only time the company actually receives the money you put in a stock. This can happen during a company’s Initial Public Offering (IPO), i.e. when the company first lists on a stock exchange and existing investors sell parts or all of their shares to the wider public. There may also be later opportunities, but in any case such events are difficult to get access to for retail investors like you or me.

A second option is participating in Private Equity Crowdfunding. With private equity, you also buy stock in a company, but not through public stock exchanges. It’s therefore quite different and not suitable for everyone, as I explain here.

Investing in Active Stewardship funds

This approach is built around the idea, that the fund represents investors’ voting rights at shareholder meetings, supporting sustainable initiatives. Some activist investors even launch their own proposals.

Take Ethos, a Swiss Foundation advising pension funds on active stewardship, but also a range of own investment funds. Ethos leverages this weight, together with likeminded investors, to launch shareholder resolutions challenging the companies they invest in. For instance, in January 2026, they joined a coalition of 23 international investors representing more than 1.5 trillion euros in assets under management to challenge Shell and BP. The alliance asked Big Oil to explain how they intend to create value in a world with declining demand for oil and gas.

Such “investor activism” is useful in companies that are transitioning, but not fully green yet. Here, active stewardship can urge the company’s board to move faster and bolder (or start moving in the first place). In such a case, it may even make sense to use the Best-in-Class approach as found in many Ethos funds. It will automatically include companies that are not perfect, but making serious efforts.

Most regular funds and ETFs don’t work this way. You can find those that do by looking for something like “systematic exercise of voting rights according to our ethics guidelines” in their factsheet.

When large divestment campaigns actually work

In some cases, companies have been driven to take corrective action after large investors threatened to sell their shares. Some have also followed through. A famous example is the divestment drive aimed at South Africa during apartheid. More recently, the Norwegian State Fund, the world’s biggest at $2.1 trillion, has adopted a divestment policy for companies that fall foul of its ethical standards.

Such divestments work if a large actor with billions of investments can create a big PR bang that damages the target company’s reputation. A headline-grabbing press release can also raise awareness among the public and spur political action, both of which may have indirect financial impacts. But nothing will happen if hundreds or even thousands of small investors sell (or don’t buy) a controversial company’s shares.

Even for the big players the effectiveness of this approach is controversial, particularly since there is hardly any direct impact. Sure, the share price may take a hit from stock being sold, as well as from the reputational fallout. But in most cases, other, less scrupulous investors will pick up the sold shares at a now cheaper price. And as we discussed above, the company doesn’t suffer directly from a lower share price. Incidentally, the Norwegian State Fund has paused their divestments in November 2025, pending a review of their guidelines.

So are Sustainability Funds pointless?

I wouldn’t go that far. Sustainability funds still fulfill two important purposes:

1. They position a portfolio to benefit from the long-term shift to a more sustainable world. The companies in these funds usually have policies in place that reduce the “transition risk” in a world of increasing carbon taxes, environmental regulation and sustainability-minded consumers. They also tend to protect themselves better from “physical risks”, such as disruptions in their supply chains due to environmental disasters. And finally, companies included in sustainability funds often produce something that is needed for the sustainability transition to happen. For them, a greener world means more sales and thus better returns for their shareholders.
2. They align an investors returns with his or her values. While irrelevant for some, this is an important consideration for those of us who don’t like to earn money from business that destroys the world or harms people. And being aligned with your own principles holds value in itself!

Conclusion: Impact vs. Sustainable Investments

Let’s sum it up:

An Impact Investment actually changes something in the world, e.g. by providing money to grow a business or by influencing a company’s policies.

A Sustainable Investment considers Environmental, Social or Governance (ESG) credentials of an investment, but does not usually attempt to actively influence anyone or make a difference.

How to find the right investment for YOU

Despite the disappointing reality of Sustainable Investing, it’s still the most accessible way to invest with a conscience and well-suited to many kinds of investors. “Real” impact investments that create actual change in the world often have other downsides that make them a bit tricky. But it’s not an either-or question: you can invest parts of your money in impact-generating ways and the rest in regular stocks or funds which match certain criteria. It all depends on your needs, preferences and personal situation.

To find out what kind of investor you are and how you can make the most out of your capital based on your situation, head on over to my Step-by-Step Beginner’s Guide to Impact Investing.