By Prof. Kristjan Jespersen, Ann-Kathrin Stecklina & Helen Thiesemann

The transition to a sustainable, low-carbon economy requires not just technological advancement or policy alignment but substantial capital investments. Sustainable infrastructure has faced macroeconomic headwinds, while simultaneously governmental investments are decreasing. Hence, the role of private capital, particularly from institutional investors, has become increasingly critical to close the financing gap. A substantial mismatch between capital targeted and capital raised persists in the market, posing significant challenges to meet investment needs required to achieve the SDGs, combat climate change, and enable social improvements.

Sustainable infrastructure, as an asset class, presents multiple barriers due to its inherent complexity and associated risks, explaining the underinvestment in the sector. These challenges are further heightened by the risk-averse nature of institutional investors, whose decisions are shaped by fiduciary duties and a focus on market returns. This highlights the need for holistic approaches that address the cognitive limitations of institutional investors in order to increase capital allocation towards sustainable infrastructure.

A behavioural lens on sustainable finance

To date, most research has focused on how regulatory reforms and policy interventions influence the capital allocation decisions of institutional investors. As a result, this paper adopts an exploratory research design to investigate how behavioural economics, specifically Nudge Theory, can influence institutional investors to allocate more capital towards sustainable infrastructure investments (SII).

Nudges are subtle changes in the choice architecture that guide decision-making towards choices that improve lives and that of society at large, without restricting the freedom of choice. While nudging has been widely tested on individuals and retail investors, its application to institutional actors remains underexplored.

Empirical analysis
To bridge the research gap, semi-structured interviews with asset owners and managers across Europe have been conducted, while applying a deductive research approach to analyse the capital allocation of institutional investors under the lens of three theoretical frameworks: Nudge Theory, New Institutional
Economics, and the Behavioural Theory of the Firm. Based on these theories, the relevance and applicability of nudges among institutional investors is explored and how nudges can mediate the effects of cognitive limitations as well as institutional and intra-organisational constraints is investigated.

Key findings

Empirical findings reveal that cognitive limitations shape investment decisions, even in the institutional context. While many institutional investors aim to act rationally, their decisions are influenced by heuristics and biases, formal and informal rules, as well as standard operating procedures. Within the interviews, it became evident that behavioural interventions are already subconsciously utilised by asset managers and perceived to actively shape decision-making of asset owners, influencing their commitment towards SII. Nudges such as framing, priming, and Sustainable Finance Literacy (SFL) initiatives indicate a strong and promising influence, while default options and a small fee received
greater scepticism in their applicability due to the inherent difficulty of implementing such nudges. In consequence, nudges offer a promising yet underutilised avenue for asset managers to accelerate capital flow towards sustainable infrastructure.

However, their effectiveness remains contingent on the risk-return ratio, the institutional settings, and organisational context. Nudges were tested to effectively mediate the impact of cognitive limitations and biases present within institutional investors, while no matter how well designed, they cannot mediate fundamental institutional constraints but rather be understood as additional efforts in influencing the decision-making. Lastly, nudges indicate to mediate intra-organisational constraints by leveraging bounded rationality and reducing ambiguity around the asset class. Overall, nudges are not silver bullets but serve as an effective strategic intervention to influence institutional investors’ decision-making to allocate capital towards SII.

Implications for asset managers and policymakers

The research opens a new avenue for both scholars and practitioners by demonstrating how behavioural tools can bridge the gap between sustainability ambition and capital allocation. While structural reforms and incentives remain important, nudges provide a complement to institutional reforms.

For asset managers, the findings underscore the importance of tailoring communication strategies to the individual preferences of asset owners by emphasising distinct aspects of the investment option and aligning nudging mechanisms with fiduciary duties. Furthermore, trust and long-term relationships can be strengthened by employing social norm nudges and targeted relationship-building initiatives.

Furthermore, the study highlights that the effectiveness of nudges demands policy alignment to realign market dynamics and reduce barriers to sustainable capital allocation. The market must be stimulated through a unified set of sustainability definitions and ESG metrics, an inclusion of long-term sustainability objectives in the definition of fiduciary duty, and regulatory stability achieved through subsidy and tax regimes. Hence, while nudges can facilitate behavioural shifts, broader systemic reforms are essential to enable and sustain meaningful change.

In conclusion, this research provides empirical and theoretical insights into how behavioural interventions, in the form of nudges, can drive change in investment practices, enhance societal welfare, and mobilise private capital to close the substantial financing gap in sustainable infrastructure.

About the authors:

Prof. Kristjan Jespersen is an Associate Professor in Sustainable Innovation and Entrepreneurship at the Copenhagen Business School (CBS). Kristjan is an Associate Professor at the Copenhagen Business School (CBS). As a primary area of focus, he studies the growing development and management of Ecosystem Services in developing countries. Within the field, Kristjan focuses his attention on the institutional legitimacy of such initiatives and the overall compensation tools used to ensure compliance. He has a background in International Relations and Economics.  

Ann-Kathrin Stecklina works as a student consultant at Prokura, supporting strategy and operations projects with a focus on procurement and supply chain management. Ann-Kathrin has a background in broader management consulting and innovation management, while her experience in working at a social enterprise raised her passion about sustainability and impact-driven strategies. She is completing her Master’s degree in International Business at Copenhagen Business School (CBS), where she had the opportunity to study abroad in Canada to deepen her understanding of global markets and cross-cultural management. This thesis was written under the guidance of Professor Kristjan Jespersen, in collaboration with her thesis partner Helen Thiesemann.

Helen Thiesemann works as a student analyst at Copenhagen Infrastructure Partners (CIP), supporting Go-to-Market strategies within Investor Relations and Business Development. Her current work further reflects her interest in sustainable investments. Previously, she worked in management consulting as well as investment bank transformation. Helen is now completing her Master’s degree in International Business at Copenhagen Business School (CBS), where she had the opportunity to write her master thesis with her thesis partner Ann-Kathrin Stecklina under the guidance of Professor Kristjan Jespersen. Helen also volunteers at the AMES Foundation, a “for impact” organisation with the mission of making biodiversity scalable and profitable so that Africa becomes a safer place for animals.

By Prof. Kristjan Jespersen, Cornelius Jonathan Cappelørn & August Otto Fenger Paludan

Private equity (PE) represents one of the most influential, dynamic, and secretive forces in modern finance, an engine of capitalism characterized by aggressive value creation initiatives, operational transformations, and high return expectations. Traditionally focused on financial performance above all else, PE has evolved into a powerful force reshaping industries through active ownership approaches and long-term strategic control. As the landscape shifts in response to changing societal expectations and global challenges, new questions arise about how PE can continue to outperform – and whether this outperformance should evolve beyond the income statement. 

PE Investors are increasingly focusing on sustainable verticals, not only for the general good of the planet, but because these verticals offer attractive growth prospects. Contemporary research highlights the increased importance of sustainability as a value driver, as firms seek to balance profitability with ESG. The notion that ESG is viewed as a cost centre for risk mitigation is challenged by perspectives that sustainability can be a strategic value and profit driver, enhancing value creation in PE at every stage of the investment process. Despite only 20% of General Partners (GPs) embedding ESG professionals in investment teams, such constellations tend to outperform. Findings support sustainable PE investing as a driver of investor engagement, new value creation sources and differentiated investment strategies. 

Rethinking Private Equity: Can Sustainability Drive Alpha in Europe? 

Private equity (PE) firms across Europe are increasingly investing in sustainable industries – but does going green pay off? A recent study from Copenhagen Business School explores this timely question, examining whether exposure to sustainable verticals improves fundraising outcomes, value creation strategies, and ultimately, return on investment (alpha) in European PE. 

Using a mixed-methods approach, the authors combine fund-level data from 207 European PE funds with eleven semi-structured interviews from leading PE investment firms like Novo Holdings, FSN Capital, Vitruvian Partners and Nordic Alpha Partners. Findings provide conditional support: Sustainable investments, when backed by institutionalized capabilities, can enhance PE fund performance in terms of fundraising, value creation and returns. 

Sustainability Signals Attract LP Capital If Backed by Substance 

Sustainable investment strategies increasingly serve as a fundraising differentiator. Limited Partners (LPs) are allocating capital to GPs who can credibly demonstrate alignment with environmental goals. However, signaling alone isn’t enough. LPs now expect PE funds to show internal ESG capabilities and clear integration into decision-making processes. As the thesis puts it, “sustainability is no longer a nice-to-have but a core differentiator”, if it can be backed up by institutionalized resources and capabilities. 

Specialization Matters – Especially in Sustainable Verticals 

Funds that specialize in sustainable verticals such as energy transition, green infrastructure, or sustainable agriculture, tend to outperform generalist counterparts when it comes to active value creation. Why? Because specialization reduces information asymmetries during both the deal-sourcing and ownership phases, enabling a better understanding of the asset. These funds build up domain-specific expertise and operational toolkits that generalist funds often lack. 

Sustainability Can Boost Returns, But May Also Increase Risk 

The thesis finds a statistically significant 3.97 percentage point increase in IRR for funds with high exposure to sustainable verticals. However, this return premium comes with increased volatility. While sustainability exposure seems to enhance IRR, it does not show the same effect on cash-on-cash metrics like TVPI. This suggests that the financial impact of sustainable investing may depend on how you measure it, and how well it is executed. 

Illustration 1: Number of Funds, Standard Deviation, Mean and Median IRR and TVPI by PE Funds with Exposure to Sustainable Verticals versus PE Funds with No Exposure to Sustainable Verticals 

Illustration 2: Number of Funds, Standard Deviation, Mean and Median IRR and TVPI by Generalist PE Funds versus Specialist PE Funds. 

Challenges and Trade-Offs 

Investing in sustainable verticals does not come without challenges. These industries often have fragmented value chains, regulatory uncertainty, and Capex-intensive business models. The research underscores that generating strong returns requires deep sector knowledge, operational engagement, and credible ESG resources and capabilities. 

Moreover, the current funding gap in Greentech presents a structural risk. Despite ambitious climate goals, growth-stage funding for Greentech remains insufficient. The authors suggest that new partnership models such as blended finance and public-private co-investment are necessary to bridge this “valley of death” and unlock the full potential of sustainability in PE growth investing. 

Implications for PE 4.0 

The thesis frames this evolution as part of “PE 4.0” – new era where value creation mechanisms expand beyond traditional financial engineering to include ESG integration, operational transformation, and long-term risk mitigation. In this model, sustainability is not a constraint, but a strategic lever. 

Final Thoughts 

The study provides a comprehensive empirical contribution to sustainable investing in European PE. It challenges the outdated dichotomy between “doing good” and “doing well,” showing that, under the right conditions, PE firms can achieve both simultaneously. The findings raise a crucial question for practitioners: Is your strategy future-fit, or falling behind? 

About the Authors: 

Prof. Kristjan Jespersen is an Associate Professor in Sustainable Innovation and Entrepreneurship at the Copenhagen Business School (CBS). Kristjan is an Associate Professor at the Copenhagen Business School (CBS). As a primary area of focus, he studies the growing development and management of Ecosystem Services in developing countries. Within the field, Kristjan focuses his attention on the institutional legitimacy of such initiatives and the overall compensation tools used to ensure compliance. He has a background in International Relations and Economics.  

Cornelius Jonathan Cappelørn holds a MSc Finance and Strategic Management from Copenhagen Business School (CBS) and currently works in the Planetary Health Investments team at Novo Holdings in their Copenhagen Office. Prior to joining Novo Holdings, Cornelius worked in Equity Research at SEB Investment Banking covering Nordic equities and equity-related transactions within biotech, healthcare, shipping, consumer goods and construction. 

August Otto Fenger Paludan holds a MSc Finance and Strategic Management from Copenhagen Business School (CBS) and currently works in the FEF (value creation) team at FSN Capital Partners in their Copenhagen Office. Prior to joining FSN Capital Partners, August worked in Management Consulting with Kvadrant Consulting in Copenhagen where he engaged in commercial due diligence for PE clients. 

By Prof. Kristjan Jespersen and Alexzander Ellekilde

In recent years, sustainable investing has shifted from a niche interest to mainstream practice, driven by climate-conscious investors and institutions eager to align their financial goals with ethical values. ESG (Environmental, Social, and Governance) exchange-traded funds (ETFs) have emerged as a favored solution promising both sustainability and market-level returns. Yet are ESG ETFs truly distinct in their impact and performance?

And still further other questions linger behind the ESG label on these investment vehicles: Are investors really doing good without giving up returns? And perhaps even more essential, are these ESG ETFs structurally different from their conventional counterparts? What exactly are investors getting when investing in these assets?

Our recent analysis addresses this very question by examining 28 passively managed European ESG ETFs over an 11-year period, comparing their financial performance and sector allocations against the MSCI All Country World Index (MSCI ACWI). Our findings indicate that ESG ETFs slightly underperformed the MSCI ACWI in terms of returns, but the performance gap was minimal, suggesting investors aren’t significantly sacrificing financial gains for ethical alignment.

The Main Findings

1. Modest Underperformance

The ESG ETF portfolio underperformed the MSCI ACWI slightly in terms of both raw and risk-adjusted returns. However, the difference was minor and should not deter the average investor from seeking exposure to these.

2. Lower Volatility

ESG ETFs were generally less volatile than the benchmark. This supports the idea that sustainable investing may offer a smoother ride compared to conventional investments.

3. No Alpha

Across all factor model specifications, there was no statistically significant alpha. In plain terms, the ESG ETFs did not beat the market and performed in accordance with expectations.

4. High Correlation

Return correlation between ESG ETFs and the benchmark was consistently high. The sector allocations of the ESG portfolio closely mirrored that of the MSCI ACWI, which indicates that the ESG ETFs are not heavily skewed by ESG screening. Thus, no sector allocation bias was detected.

Implications and Insights

So, what insight should investors take away from this? Most importantly: sustainable investing through ESG ETFs does not necessitate a financial sacrifice. These products are financially viable and relatively low risk. They are not delivering outperformance, but they are not lacking significantly behind either – a reassuring message for those looking to align investments with ethical values.

However, perhaps the most important insight was the question that was raised by the close alignment between ESG ETFs and the benchmark: how much substance is behind the ESG label? While the ETFs used in this study carry an ESG label, the analysis showed that in many instances their actual composition and return behavior nearly mirror the conventional index. If they behave just like conventional funds, is the ESG label doing anything other than making investors feel better while paying a premium and checking an ESG box to meet fund labeling requirements?

The strong return correlation and the lack of a major sector allocation deviation suggests that many ESG ETFs are, for all practical purposes, simply traditional passive market funds. This may reflect a desire by fund providers to minimize tracking error and to protect profitability once the fund reaches a certain size, yet these actions run the risk of diluting the ESG narrative.

While these products offer accessible exposure to sustainable investing, those looking for deep ESG integration might be disappointed. The majority of European ESG ETFs that were investigated seem built more for appeal than impact.

Looking Ahead

Figure 1 – Key areas of concern for the future of ESG ETFs.

The study confirms that ESG ETFs can deliver competitive financial performance without requiring investors to sacrifice returns. This is a promising signal for the viability of sustainable investing, yet it also reveals something more complex.

If ESG ETFs behave almost identically to a conventional index that applies no ESG screenings, what differentiates them beyond the label? As ESG ETFs grow in size, they appear to become increasingly more benchmark aligned. This raises an important and underexplored question: Do ESG ETFs start out more distinct and gradually lose that distinction as they scale?

If true, it points to a tension in passive sustainable investing. A tension between ESG integrity and the incentive to attract capital and minimize tracking error that may slowly erode the ESG characteristics that justified the products in the first place. In that case, ESG becomes more of a compliance badge or marketing feature than a genuinely meaningful investment filter.

Understanding this dynamic and the potential institutional pressures behind it is essential to assessing the real impact of ESG ETFs, especially from a sustainability point of view. It could inform future regulation, ESG rating methodological standards, and how investors evaluate potential investment products.

In conclusion, ESG ETFs offer investors a practical route to responsible investing without meaningful financial sacrifice. Yet, ensuring these ETFs deliver substantive ESG impacts –beyond superficial labeling – requires ongoing vigilance, clearer standards, and active stakeholder engagement. Ultimately, their true value will be determined not only by market performance but by measurable contributions to sustainability goals.

About the Authors

Prof. Kristjan Jespersen is an Associate Professor in Sustainable Innovation and Entrepreneurship at the Copenhagen Business School (CBS). Kristjan is an Associate Professor at the Copenhagen Business School (CBS). As a primary area of focus, he studies the growing development and management of Ecosystem Services in developing countries. Within the field, Kristjan focuses his attention on the institutional legitimacy of such initiatives and the overall compensation tools used to ensure compliance. He has a background in International Relations and Economics. 

Alexzander Ellekilde recently completed an MSc in Applied Economics and Finance at Copenhagen Business School. His academic interest spans investment analysis, financial markets, and sustainable finance topics. This August, he will be joining Shark Solutions as a Business Analyst, continuing to explore the intersection of business strategy and financial performance in a sustainability-focused business environment.

By Prof. Kristjan Jespersen, Alice Almgren and Tove Sellert Pehrsson

The EU Taxonomy, introduced in 2020 as part of the EU’s Sustainable Finance Strategy and the European Green Deal, is a landmark classification system designed to direct investments toward sustainable economic activities. Its primary objective is to boost  market transparency and direct financial flows to activities that contribute to climate neutrality by 2050 (European Commission, 2024; European Commission, n.d.). However, translating these ambitions into actionable results has proven complex. From inconsistent data to challenging reporting requirements, both financial institutions and corporations face significant hurdles. This article explores the key challenges and opportunities associated with the EU taxonomy and its impact on financial markets, particularly Article 9 funds.

Our insights combine a review of academic and industry literature with a data-driven analysis.  

Drawing on information from peer-reviewed journals and reports, we incorporate data from LSEG Workspace, including both directly reported and modeled estimates of EU Taxonomy alignment. Our analysis spans both company- and fund-level perspectives, covering all publicly listed European firms and Article 9 mutual funds, with data collected between October and November 2024.

Implementation Challenges and Data Gaps

A key challenge in implementing the EU Taxonomy lies in its complex reporting framework.  Companies and financial institutions must assess and disclose the extent to which their activities are eligible and align with the taxonomy’s environmental objectives. Eligibility serves as a foundation for companies to evaluate their activities against the taxonomy and determine whether they fit within its scope. Furthermore, to be considered aligned, activities must contribute substantially to at least one of the six environmental goals outlined in the taxonomy, while also meeting the Do No Significant Harm (DNSH) and Minimum Social Safeguards (MSS) criteria. However, organizations often struggle with understanding these requirements, leading to inconsistencies in reporting (Niewold, 2024; Hofstetter & Babayéguidian, 2024; KPMG International, 2024). Another major hurdle is data availability. Our analysis shows that only a small fraction of European public-listed companies report data relevant to the taxonomy,  with coverage varying from 3% to 24% across different regions. Furthermore, missing data on key indicators, such as taxonomy-aligned revenue, capital expenditures (CapEx), and operating expenditures (OpEx) ranges from 89% to 95%.

These figures highlight the significant gaps that hinder comprehensive assessments of companies’ sustainability performances.

Figure 1: Number of companies (%) that are actively reporting on the EU Taxonomy by European Region

Figure 2:  Data coverage for several EU Taxonomy metrics of public-listed European companies

The discrepancy between the share of eligibility and alignment shows that while companies have been able to identify activities within the taxonomy’s scope, alignment levels remain substantially lower with public listed companies in Europe reporting 11%, 14%, and 10% aligned revenue, CapEx, and OpEx, respectively. These figures underscore the difficulties of achieving alignment, even as companies increasingly engage with the taxonomy’s scope and reporting requirements.

Figure 3: Average eligible and aligned revenue, CapEx and OpEx reported by public-listed European companies

Financial Institutions and Article 9 Funds Financial institutions’ occupy a dual role within the EU Taxomomy framework – they are both users and preparers of sustainable disclosures. This dual role makes financial institutions face additional complexity as their own disclosures are dependent on receiving information by other organisations (Garcia-Torea et al., 2024). Current gaps in data availability present challenges for financial institutions in implementing the EU taxonomy in their reporting and investment decisions. Detailed data on specific investments and companies is missing, making it difficult to clearly identify green investments under the taxonomy. There are also large discrepancies in how firms report alignment indicating challenges in implementation and reporting of the taxonomy’s criteria. This makes it difficult to trace financial flows to their direct impacts and to gain a clear overview of how finance connects to real sustainable activities. As a result, proxy indicators and simplified assumptions may be used, not covering the full picture of sustainable investments (Becker et al., 2024). This suggest that financial institutions not only face obstacles in gathering enough data to make informed investment decision but also in obtaining adequate information required for reporting.

The situation is especially pronounced among Article 9 funds, which are classified under the SFDR as “dark green” and are expected to focus on sustainable investments. In our sample, while 80% of Article 9 funds report having sustainable investments, only 40% report any taxonomy alignment. On average, these funds report 14% of their portfolios as taxonomy-aligned, compared to a 94% share labeled as sustainable. These figures point to the practical limitations of taxonomy-based reporting in its current form, suggesting that the taxonomy may not yet offer a reliable benchmark for sustainability.

Furthermore, only 25% of Article 9 funds have disclosed in their Pre-Contractual Reports their planned or minimum share of taxonomy-aligned investments. The average share of such aligned investments is 10% among these funds. This means that even within the 25% of funds setting a commitment the average share of investments is small. This may be due to funds’ reluctance in committing to thresholds that they might not be able to meet, considering the findings that few funds have investments aligned with the taxonomy and those that do typically have quite small portions of their portfolios in these activities.

Figure 4: Number of Article 9 funds reporting on sustainable, taxonomy-aligned and minimum or planned taxonomy-aligned investments

Figure 5: Article 9 funds’ share of sustainable, taxonomy-aligned and minimum or planned taxonomy-aligned investments

Conclusion: Overcoming Complexity for Effective Implementation

The EU Taxonomy is a powerful tool with the potential to reshape how capital is directed toward sustainable activities. However, its current complexity and data gaps limit its effectiveness. For the taxonomy to fulfill its promise, stakeholders must prioritize streamlining reporting requirements, improving data availability, and setting more realistic expectations for implementation timelines.

Recent policy developments, such as the EU’s omnibus proposal, suggest that reforms are already in motion. Whether these changes will be enough to bridge the gap between intention and impact remains to be seen. As sustainable finance continues to evolve, striking the right balance between ambition and practicality will be essential for meaningful progress.

About the Authors:

Prof. Kristjan Jespersen is an Associate Professor in Sustainable Innovation and Entrepreneurship at the Copenhagen Business School (CBS). Kristjan is an Associate Professor at the Copenhagen Business School (CBS). As a primary area of focus, he studies the growing development and management of Ecosystem Services in developing countries. Within the field, Kristjan focuses his attention on the institutional legitimacy of such initiatives and the overall compensation tools used to ensure compliance. He has a background in International Relations and Economics. 

Alice Almgren and Tove Sellert Pehrsson are completing their Master’s degree in International Business and Politics at Copenhagen Business School (CBS), with a minor in ESG and Sustainable Investments, where this project with London Stock Exchange Group was developed by their team under the guidance of Professor Kristjan Jespersen. Alice works in GN Store Nord’s Strategy and Transformation team, where she supports strategic and commercial projects, including go-to-market plans, channel strategies, and transformation initiatives. Tove works with strategic sustainability consulting at Ramboll Management Consulting, where she supports projects related to ESG strategy, corporate sustainability reporting, and responsible business conduct.

Passionate about sustainability and sustainable finance, Alice and Tove are currently writing their master thesis on the interplay between SFDR and the EU taxonomy and its impact on the reporting and investment decisions of Article 9 funds. Using fund data from LSEG Workspace and interviews with fund managers, their research examines the differences between Article 9 funds that report taxonomy-aligned investments and those that do not. It explores the broader implications of these reporting decisions on ESG-related behaviors and investigates why fund managers may choose to not report on the taxonomy. The goal of the research is to provide insights into how the relationship between SFDR and the EU taxonomy affect the credibility of sustainable investments.