Are Sustainability Risks Being Mispriced?

Key Takeaways:

• Most managers believe sustainability risks remain underpriced, creating potential alpha opportunities.
• European managers see the greatest mispricing, while U.S. peers are more confident that markets already reflect these risks.
• Larger firms, backed by deeper research and proprietary ESG data, remain the most convinced that transition and regulatory risks are under-discounted.

Are sustainability risks already priced into markets or is the picture still incomplete? Amid rising political scrutiny and renewed debates around fiduciary duty, investors are reassessing whether markets truly capture the financial implications of sustainability risks.

Our research shows that most managers believe Environmental, Social, and Governance (ESG) factors—ranging from climate transition and regulation to governance shortfalls—remain materially undervalued, creating both portfolio risks and potential alpha opportunities.

The findings show that 60% of managers who responded to our survey believe ESG risks are underpriced, while a minority view them as fully reflected in current valuations. The remaining respondents take a middle ground, arguing that some, but not all risks are partially priced in.

Majority of respondents say ESG risks are not priced into portfolios

Question:  In your opinion, and generally speaking, to what degree has the equity market priced in ESG‑related risks?

Source: 11th Annual ​Manager Sustainable Investing Survey

The results reveal clear regional contrasts. European managers are the most convinced that markets still underestimate ESG risks, while Canadian peers, though largely aligned, show a bit more balance.

U.S. managers remain more confident that ESG factors are already reflected in prices, potentially illustrating different views on market efficiency and client priorities. Asia-Pacific firms show mixed opinions, mirroring the region’s uneven pace of ESG integration.

U.S., APAC respondents more convinced ESG risks are fully priced

Source: 11th Annual ​Manager Sustainable Investing Survey

Scale also matters. Larger managers (>$100B) are the most convinced that ESG risks remain mispriced, with around four in five seeing markets as underestimating sustainability factors. This difference may be due to larger managers typically having deeper research reach and sharper ESG analytics.

Mid-sized firms share this skepticism, though some hedge their views, calling ESG only partially priced. Smaller players (<$50B) are more balanced, reflecting a focus on near-term market signals over long-horizon ESG risks.

Larger schemes are more convinced of ESG risk mispricing

Source: 11th Annual ​Manager Sustainable Investing Survey

For asset owners, the takeaway is one of opportunity. If most managers see ESG risks as undervalued, the ability to identify and act on unpriced or under-recognised factors can become a genuine competitive advantage. Partnering with organisations that combine robust ESG research with disciplined portfolio integration can help turn these market inefficiencies into stronger risk-adjusted returns.

If you would like to learn about Russell Investments’ approach to stewardship and manager research process, please get in touch.

Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.

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