Introduction
Geopolitical rivalry is the competition for economic, military and technological power and influence between nations or blocs of nations. It often manifests itself in the form of sanctions, export bans, screening of inward and outward investment plans on national security grounds, subsidies to induce repatriation of production, and import tariffs. It impacts companies by affecting their revenue streams, costs, ability to scale of operations and innovate. Geopolitical rivalries can contribute to political polarization by influencing national discourse, intensifying ideological divides, and fostering a more antagonistic political environment both internationally and domestically.
We are living an era of heightened geopolitical rivalries and risk. In this article, we argue that geopolitical risk is reshaping the landscape for investing, posing specific challenges to sustainable investing and to advancing the broader SDG agenda. This question is especially pertinent to the Middle East, Africa, and Southern Asia (MEASA) region, which is often caught in the power struggle between the US and China and stands at the center of significant geopolitical developments.
Transition Investment is an investment approach designed to support the global shift towards achieving the United Nations Sustainable Development Goals (SDGs), by focusing on global challenges in areas such as poverty alleviation, healthcare, education, climate change, peace and justice. It implies aligning capital commitment with long-term value creation and positive contribution towards the SDGs, while generating acceptable financial returns. Transition Investment differs from impact investing in that it does not involve concessionary returns or below-market financial performance. Instead, it aims to enable investors to capitalize on the opportunities arising from the structural changes needed to address the global challenges represented by the SDGs.
In what follows, we will show that Transition Investment is uniquely positioned to mitigate geopolitical risks and drive progress on the SDG agenda amid the multiple disruptions and crises that define these challenging times.
A new geopolitical landscape
The ongoing changes in the geopolitical context are mainly caused by a rebalancing of global power and influence, driven by the US-China contest and the emergence of middle powers, the reconfiguration of supply chains, growing skepticism toward global institutions and a rules-based order, and domestic political tensions, fueled by inequality and inflation, causing an increase in political polarization and populism.
The great power competition between the US and China represents a significant geopolitical challenge, as both nations seek to maintain or increase their economic, military, and technological power and influence. This rivalry has prompted the hardening of security and industrial policy and an increase in state intervention in trade, mainly through sanctions, export controls, tariffs and quotas, leading to volatility in global markets and disruptions in supply chains.
The increasing influence of middle powers and the emergence of new economic and geopolitical blocs are reshaping the global order. These middle powers—typically countries like Brazil, Turkey, South Korea, and Indonesia—are demonstrating a greater sense of agency in advancing their national interests. They are becoming more pragmatic, opting to form strategic partnerships that are based on issue-specific needs rather than aligning with traditional blocs or alliances led by major powers like the U.S., China, or the EU.
This shift towards more flexible diplomacy has significant implications for global trade, security, and governance. The old patterns of predictable alliances are breaking down, creating a more fluid and often more competitive international environment. Middle powers are forging new ties, participating in regional organizations like ASEAN or the African Union, or even forming new economic arrangements such as BRICS or the G20. This diversification adds layers of complexity and uncertainty to global governance as countries prioritize their national interests in a multipolar world, which may lead to both opportunities for cooperation and risks of fragmentation in key global issues like trade, climate change, and security. This trend increases unpredictability in diplomacy and global trade, as traditional alliances no longer dictate how states align on major issues.
Moreover, these vulnerabilities resulting from the COVID pandemic and the outbreak of conflicts in Europe and Middle East are intensifying scrutiny and revealing weaknesses of multilateral institutions, raising distrust of the effectiveness and fairness of global governance arrangements and rules-based order.
As a result, globalization is being put under strain and eroded by trade wars and protectionism. This is compounded by rising inequalities within countries, diminishing support for policies that promote international cooperation, long-term approaches rather than transactional short-term ones, and contributions to addressing sustainable development challenges abroad rather than at home.
Geopolitical risk’s impact on sustainable investments
The current and evolving geopolitical landscape poses significant threats to large-scale capital mobilization for sustainable investing, hindering progress toward the SDGs, particularly in MEASA, where these investments are critically needed. Below, we review the main channels through which these challenges manifest.
Challenge 1. Missing the mark on global challenges.
Most SDG-related challenges such as climate change, environmental protection, poverty eradication, health, food security, are global in nature, and stem from cross-border externalities or common goods. Effectively addressing these global market failures requires international cooperation, mutual trust, and long-term collaboration. However, as economies and societies increasingly turn inward, attention to global challenges diminishes, fragmenting policies and regulation, and reducing the likelihood of forming the cross-border investment partnerships that are essential for a successful transition.
Challenge 2. ESG politicized backlash.
In developed economies, sustainability and Environmental, Social, and Governance (ESG) issues has been politicized, increasing the polarization between the left and right of the political spectrum. For example, right-wing platforms in the West are increasingly opposing hastened energy transition and climate-change policies. This opposition and criticism of ESG investing and alleged violation of fiduciary duties, can lead to concern of left-wing policies being introduced by stealth, bypassing legislation and democratic oversight. Greenwashing scandals and growing skepticism about the tangible impact of these investments and associated financial returns further exacerbated this sentiment, culminated in legislation to limit or ban ESG investment practices. In a similar vein, the rise of right leaning governments in Europe is deprioritizing policies and investments addressing long-term sustainability challenges towards in favor of domestic security issues. For example, geopolitical turmoil can divert public and private capital from long-term development projects aligned to SDGs to short-term, security-oriented priorities, such as national defense.
Challenge 3. Deepening investment deficit in the Global South.
Globalization has generated widespread discontent in developed economies, fueling a backlash against cross-border capital flows and foreign direct investments (FDIs). To appease domestic voters, governments have increasingly adopted protectionist policies that favor local constituencies. This shift toward domestic bias in trade and investment policies has deprioritized international aid and development finance, further scaling down sustainable investments in the Global South. The decline will reduce offshoring and hinder the integration of MEASA region’s emerging economies into global markets. With fewer foreign direct investments (FDIs), these nations will face difficulties in developing sustainable, competitive industries, stunting economic growth and socio-economic development. This not only obstructs their progress toward SDGs but also deepens economic disparities and social inequalities, weakening social cohesion. Consequently, this undermines efforts to achieve a more integrated and stable Global South that could mitigate risks and attract further investment.
Challenge 4. A shorter horizon in investment decisions.
Elevated political uncertainty is likely to deter SDG-aligned investments which typically occur in illiquid private markets and require a longer-term approach, as investors may pivot towards more immediate, transactional and lower risk opportunities. For example, geopolitical challenges can divert public and private capital from long-term development projects to short-term, security-oriented priorities.
What the data tells us
Despite a deterioration in the geopolitical climate, sentiment in financial markets has remained buoyant throughout. The expectation of disinflation and soft landing in developed economies has been a major tailwind that pushed a stellar growth of asset prices and a compression of risk premia across all major asset classes, increasing correlation, and lowering volatility. But this is an environment in which asset repricing can happen quickly. According to IMF Global Stability Report (2024), geopolitical tensions, commodity and supply chain disruptions are examples of catalysts that could usurp current expectations of the trajectory of inflation and tighten sharply financial conditions.
The absence of a market correction so far is a clear illustration of how financial markets underestimate the long-term impacts of geopolitical risk factors. However, recent regime shifts are beginning to have tangible effects, reducing both the scale and momentum of sustainable investments. The most relevant data points and facts are listed here.
Fact 1. Shifting business priorities.
According to corporate filings to the US Securities and Exchange Commission (SEC), for the first time in 2022, more internationally active firms mentioned geopolitical factors as driving business decisions or influencing risk assessments than terms relating to ESG matters, sustainability or climate change.
Fact 2. De-globalization kicks in.
Foreign Direct Investment (FDI) has slowed down 2023 in most regions (see Fig. 1). The decline has been particularly dramatic in developing economies. For example, FDI inflows into the MEASA region contracted on average by 6%. This trend is broadly consistent with the decline in global trade and the increased domestic focus on investments prompted by geopolitical crises. As shown in Fig. 2, the MEASA remains heavily underinvested, particularly in Africa and Middle East.
Fact 3. Investment gap widening.
According to UNCTAD, the annual investment gap for achieving SDGs in 2030 has increased by 60% with respect to the 2015 estimate, reaching $4.5 trillion. The context for SDG investment has deteriorated (see Table. 1), particularly as a result of the exogenous shocks of the pandemic, the war in Ukraine and the triple food, fuel and finance crises.
Fact 4. Halftime, not halfway to the SDG.
The UN Sustainable Development Report underscores that we are at the halfway point to the SDG target year of 2030 but remain far from achieving the necessary milestones. The report documents how progress has been severely derailed post-pandemic, indicating that the world is off track in implementing the SDGs, further strained by geopolitical dynamics (see Fig. 3).
Fact 5. ESG’s hype vanishing.
According to Morningstar, global net inflows into ESG funds have been shrinking since 2021, entering negative territory in Q4 2023. According to Barclays research, net 40 USD billion have been withdrawn from ESG funds this year, reflecting growing investor skepticism and waning enthusiasm for sustainable investments, driven partly by geopolitical instability and political polarization. A similar trend is observed in private markets as reported by Preqin, with a 18% decline in the number of ESG-aligned funds managed across asset classes including private equity, infrastructure, and real estate. (see Fig. 4 and Fig 5.)
Transition Investment: navigating geopolitical crises while advancing the SDG agenda
Transition Investment’s guiding philosophy is “making a difference”: enabling a paradigm shift towards sustainability without compromising returns. It focuses on the broad class of investment opportunities where robust, non-concessionary risk-adjusted returns can be matched with transformative change in the economic, environmental, and social dimension. We argue that Transition Investment could offer a powerful solution for advancing the sustainability agenda amidst geopolitical conflicts.
First, Transition Investment is championed by large asset owners and universal investors with globally diversified portfolios, who have a vested financial interest in sustainable, inclusive global economic growth and in addressing global externalities. Ultimately, the true owners of these institutions are individuals—pensioners, policyholders, beneficiaries, taxpayers—whose interests as global citizens align in addressing the coordination failures stemming from a fragmented geopolitical landscape. While these constituencies may be widely dispersed, the stakes held by large financial institutions in Transition Investments are typically highly concentrated, creating a corporate governance structure that ensures the agency to tackle these challenges effectively.
Aimed at global citizenship, the value proposition of Transition Investment should encompass sustainability issues that are universally recognized as important on a global scale. Indeed, societal values differ significantly across cultures, making it essential for Transition Investments to focus on opportunities that create broad, inclusive benefits. Rather than targeting specific cultural or regional priorities, these investments should aim to address global challenges—such as climate change, food security, affordable healthcare, universal education, and social equity—that resonate across diverse populations. By prioritizing initiatives with the potential to deliver positive outcomes for a wide range of stakeholders, Transition Investments can ensure that their impact is both meaningful and far-reaching, regardless of cultural or societal differences.
Second, the politicization of ESG investing, as previously discussed, has been driven by concerns over potential violations of fiduciary duties by asset managers, who are accused of prioritizing politically motivated social objectives at the expense of financial returns. In contrast, as previously stated, Transition Investments are linked to validated business models that deliver strong market financial performance.
The same political backlash has also been fueled by a lack of clear definitions and unreliable data and methodologies for determining the actual impact of investments. The widespread use of related terms such as “ESG,” “Sustainable,” and “Impact” investing, often interchangeably, has led to confusion in the market. This methodological ambiguity further complicates informed investment decisions and erodes trust in sustainable investments. In contrast, Transition Investment is grounded in robust and dependable impact measurement frameworks, enabling comprehensive due diligence on the expected social benefits and providing a reliable assessment of the positive changes attributed to the investment.
Third, a notable aspect of Transition Investing is its directionality, being exclusively targeted to the MEASA region. These investments have an important role to play in promoting economic diversification, advancing sustainable development and social stability in this broader region, poised to experience rapid population growth and facing major sustainability challenges. Transition Investment will encounter similar constraints that are affecting cross border capital flows in the new geopolitical landscape. However, the major conflicts and rivalries, such as those between Western countries and Eastern powers, are concentrated in the East-West axis. Transition Investments originating in the developed economies and tapping opportunities in MEASA are instead primarily flowing in the North-South axis, which is not currently experiencing the same level of geopolitical tensions or disruptions as the other axis, making these investments relatively more viable.
Conclusion
Fractured geopolitics is hindering progress towards the SDGs. Geopolitical rivalries, protectionism, and the fragmentation of the international order have created substantial barriers to international cooperation, undermining the ethos and principles of sustainable investing, widening the investment gap.
Recent data clearly shows that the implementation of the SDG agenda is off track. The slowdown in cross-border and foreign direct investments, compounded by public discontent and increasing government policies favoring domestic investments, are responsible for this decline. Furthermore, the lack of standardization and methodological weaknesses, combined with regulatory ambiguity and deterioration in public and investor sentiment towards ESG, is hindering the widespread adoption of sustainable investing practices.
At this critical juncture, Transition Investing could be a powerful response to the geopolitical challenges of our time. It engages key financial players with a vested interest in socio-economic stability and cohesion, focuses on private markets to achieve measurable impacts, and strategically directs investments to regions less affected by the most acute challenges. By anchoring on these beliefs, Transition Investing has the potential to support the mitigation of risks heightened by geopolitical fragmentation and advancing the SDG agenda, whilst delivering acceptable returns.
Key considerations for investors include acknowledging the nuanced nature of sustainable investing, which demands a holistic approach and quantification of potential risk and impacts. Investors must engage in collaborative efforts with various stakeholders to ensure the integration of diverse perspectives, expertise and insights. This will not only enhance the effectiveness of investment decisions and but also plant the seed of inclusiveness, social resilience and future peace.