Kalle Reflects on Financial Institutions’ Shocking, Risky Gap

Kalle reflects on finance institutions and sustainability

Takeaway for leaders at all levels everywhere

There is a structural problem behind the under-performance of finance institutions—and it shows most starkly in their uneven approach to sustainability. Since the early days of the sustainability movement in the 1970s, corporate consciousness has developed in three waves. First came customer-facing brands responding to rising public concern. Next followed their suppliers in the production economy, pushed by procurement and compliance demands. Finally—late and still hesitantly—came the finance sector, which lends to and invests in those real-economy companies. This lag matters. Finance institutions and sustainability are inseparable because capital allocation decides which business models scale and which quietly fade. When the financial sector misreads sustainability risk and opportunity, it perpetuates underperformance—socially, ecologically, and economically.

Why the lag persists is not only cultural; it is structural. Most finance companies still center their sustainability lens on two narrow tracks: “ethical” screens and “clean tech” bets. Neither, on average, is moving the needle on risk-adjusted returns, nor are they sufficient to future-proof portfolios in markets increasingly shaped by sustainability dynamics. Without a science-based, systems-grounded framework— the Framework for Strategic Sustainable Development (FSSD)—investors are essentially guessing which companies are truly positioned for long-term scalability and growth.

More in detail:

The blind spot behind “ethical” and “clean tech” filters
– Ethical screens can reduce reputational risk in the short perspective, but they typically overlook whether a business is designed for systemic, strategic progress toward sustainability. A company that looks “more ethical” today is not necessarily better equipped to adapt to tightening social and ecological constraints tomorrow.
– Clean tech themes can be vital, but they do not guarantee scalability within non-negotiable sustainability boundary conditions. Nor do they ensure a technology is a flexible platform that can pivot as those boundary conditions sharpen—the “D” in FSSD’s ABCD method: designing strategic actions that are flexible stepping stones toward scalable success.

In short, the two dominant strategies rarely address whether a company’s value creation model is compatible with the funnel metaphor of the FSSD (shrinking ecological and social tolerances). If an investee’s business model cannot thrive as the funnel narrows, exposure becomes a value trap. This is why so many finance institutions underperform, even by their own economic yardsticks. Their competitors often underperform in parallel, which masks the problem in relative rankings but does not fix it.

Finance institutions and sustainability: a structural data dilemma
The finance sector faces a specific constraint: it typically does not control primary operating data from real-economy companies. Instead, most firms rely on outsourced “data providers” to rate sustainability or provide decision-ready metrics. This introduces multiple breaks in the chain of insight:
– Aggregated ratings can average away material nuances tied to business model design.
– Backward-looking indicators miss strategic direction and quality of management intent.
– Scoring methodologies may not align with science-based boundary conditions of the FSSD’s systemic lens.

The result is a false sense of precision. Investment teams mistake consistency of ratings for clarity of risk. In reality, the most consequential sustainability questions are strategic and forward-looking: Is this business architected to win as policy tightens, stakeholder expectations rise, and resource constraints bite? Ratings alone cannot answer that.

Size, sunk costs, and the exit trap
The structural issues compound with scale. Smaller, often family-owned investment firms can sometimes outperform by building direct understanding of portfolio companies and keeping portfolios nimble. Larger institutions face three reinforcing challenges:
– Sunk costs: Large legacy positions—common in pension funds—are difficult to unwind without triggering losses, especially once market consensus catches up with the funnel dynamics.
– Herding risk: Crowded “ethical” and “clean tech” trades can amplify drawdowns when narratives shift.
– Governance inertia: Complex committees and external managers slow the pivot from box-ticking ESG to strategy-driven sustainability integration.

When investors try to “vote with their feet” out of politically popular but strategically fragile themes, liquidity and timing risks compound losses. The longer a fund waits, the narrower the exit.

Where the exceptions emerge
There are bright spots. Investment firms that take board seats in start-ups or growth companies can shape strategy directly, embedding FSSD thinking into design, operations, and go-to-market before lock-in costs rise. Likewise, banks building a “good bank” advisory model—helping clients align with future market conditions and regulatory requirements—can create resilient loan books and durable relationships.

What leading finance institutions can do now
– Adopt a systems-based framework: Use the FSSD and its funnel metaphor to test business model compatibility with future boundary conditions. Deploy the ABCD method to evaluate current state, success criteria, creative options, and strategic actions.
– Build inside-out capability: Reduce overreliance on third-party ratings. Combine them with in-house strategic analysis, scenario work, and sector-specific transition pathways.
– Prioritize dynamic materiality: Focus on the few sustainability factors that will most decisively shape cash flows as policies (e.g., EU Corporate Sustainability Reporting Directive), market norms, and stakeholder expectations evolve.
– Elevate engagement to strategy: Stewardship should press for business model alignment, not incremental disclosures. Seek time-bound transition plans, capex alignment, product redesign, and supply chain resilience.
– Redesign incentives: Tie internal performance and external manager mandates to long-term value creation under sustainability constraints, not short-term outperformance against underperforming peers.
– Triage legacy positions: Establish clear exit and hold criteria based on FSSD-aligned transition evidence. Where feasible, use structured solutions to manage down risk without fire sales.
– Pilot, then scale: Launch focused sleeves that apply FSSD rigor end-to-end—thesis, diligence, engagement, measurement—then expand as proof points accumulate.
– Strengthen data contracts: Demand traceability, forward-looking indicators, and methodology transparency from data providers. Favor datasets that capture strategic readiness, not just current emissions or policies.

Regulation is raising the floor—but not the bar
New reporting regimes in Europe and beyond are improving comparability and transparency. That will help. But compliance alone will not produce outperformance. The edge will belong to finance institutions that translate disclosure into strategic foresight, linking real-world systems change to cash flow durability and growth.

Conclusion:
The finance sector arrived late to the sustainability arena, and too many firms remain stuck in narrow “ethical” and “clean tech” lanes with little ROI impact. The path forward is not more ratings, but better strategy. By grounding investment decisions in a systems-science framework like the FSSD, finance institutions and sustainability can finally reinforce each other—redirecting capital toward business models designed to thrive as the funnel narrows. Those who build this capability will not only improve social and ecological outcomes; they will also strengthen long-term financial performance, proving that sustainable value creation and superior returns can, and should, be the same ambition.

All hot topic Reflections are direct consequences of our Operative System.

For a deeper dive into the science behind the Operative System that informs all Reflections, see the peer-reviewed Open-Source paper with all its references: doi.org/10.1002/sd.3357. For the full title, see footnote below.

Or, for concluding reflections, practical insights and training, click on “Kalle Reflects” to see all reflections.

If you need any further advice, perhaps getting some further references, please send a question to us from the homepage.

Footnote: Broman, G. I., & Robèrt, K.-H. (2025). Operative System for Strategic Sustainable Development―Coordinating Analysis, Planning, Action, and Use of Supports Such as the Sustainable Development Goals, Planetary Boundaries, Circular Economy, and ScienceBased Targets. Sustainable Development, 1C16.