With political battles raging over ESG, it’s easy to miss the bigger picture: ESG investing isn’t dead or deprioritized. It’s evolving. Despite headlines about record outflows and state-level bans, long-term investors are still turning to ESG as a tool for risk-adjusted returns, portfolio diversification, and yes—even potential tax advantages.
This article explores how ESG investing fits into your tax strategy in 2025, what the latest developments (like Missouri’s blocked ESG rule) really means, and why thoughtful ESG allocation may still help you lower your tax burden while aligning with your values.
Table of Contents
- What ESG investing looks like in 2025
- How ESG can impact your tax bill
- Missouri’s blocked ESG rule: What it signals and why it matters
- How to spot tax-advantaged ESG investments
- Risks and red flags: ESG investing isn’t automatically a write-off
- Long-term strategy: Aligning values, growth, and taxes
- Get started with Harness
What ESG investing looks like in 2025
ESG investing stands for environmental, social, and governance factors. A few short years ago, it was among the fastest-growing trends in asset management. In 2020 alone, ESG funds drew $152 billion in inflows, pushing global ESG assets to $1.6 trillion.
But that momentum reversed with Russia’s 2022 invasion of Ukraine, growing political backlash in the U.S., and new regulatory fatigue in Europe. By Q1 of 2025, global sustainable funds experienced net outflows of $8.6 billion.
Despite the political headwinds, ESG is still viable—but the segment is maturing. On Wall Street, ESG bundled together wildly different investments under one “green” label. Now, investors and regulators are starting to unpack what the ESG label really means.
Climate risk still remains a central concern for institutional investors, even if socially oriented funds lose popularity. According to a 2024 Robeco survey, 62% of global investors still consider climate change a “significant” or “central” investment factor.
Meanwhile, ESG-related regulations are becoming more precise. Europe’s ESRS E1_9 rule requires companies to disclose how climate risks affect financials, disclosing everything from asset impairment to expected cost savings. This level of detail enables investors to price ESG risks and opportunities into traditional valuation models like discounted cash flow.
The takeaway: ESG investing is becoming more about risk and return than virtue signaling. That shift opens the door for tax-conscious investors to treat ESG as a serious, strategic component of their portfolio.
How ESG can impact your tax bill
If you’re a values-driven investor looking to optimize for tax, ESG funds offer more than feel-good marketing—they may unlock real deductions, deferrals, and tax-efficient growth.
Let’s break it down. ESG investments often align with sectors that benefit from favorable tax treatment such as renewable energy, green infrastructure, and conservation-focused projects.
These ESG sectors may qualify for:
- Investment tax credits (ITCs): Energy transition projects like solar or battery storage often qualify for credits you can apply directly against your tax liability.
- Bonus depreciation: If you invest through a pass-through entity like an LLC, you may be eligible to deduct a significant portion of the investment’s cost upfront.
- Qualified Opportunity Zones (QOZs): Some ESG-aligned community development projects fall under QOZ programs, offering capital gains deferral and partial exclusion.
ESG also intersects with tax strategy via charitable vehicles. For example, if you donate appreciated ESG assets to a donor-advised fund (DAF), you may receive a full market-value deduction and avoid capital gains tax entirely. That’s especially relevant for investors rebalancing out of underperforming ESG positions in today’s volatile market (IEEFA).
Missouri’s blocked ESG rule: What it signals and why it matters
In August 2024, a federal district court struck down Missouri’s attempt to limit ESG investing. The rules, championed by Secretary of State Jay Ashcroft, would have prohibited investment advisors from considering ESG factors without written client consent.
But the court, however, sided with the Securities Industry and Financial Markets Association (SIFMA), ruling the regulations unconstitutional. Missouri initially filed an appeal—then abruptly dropped it in September, agreeing to pay $500,000 in legal fees to SIFMA.
At first glance, this looks like a narrow legal outcome. But for investors and financial advisors, it signals something bigger: states may not have the constitutional authority to dictate how ESG factors are used in portfolio construction.
That matters, especially as 18 other Republican-led states have passed or proposed similar rules. By ending the appeal, Missouri avoided a precedent-setting ruling from the Eighth Circuit that could have dismantled anti-ESG regulations across the country.
The Missouri decision doesn’t just preserve ESG investing in that state; it reinforces the right of advisors and investors to consider or include ESG factors when building a portfolio. That’s critical for anyone who wants to integrate sustainability, governance, or social impact considerations alongside financial returns and tax efficiency.
How to spot tax-advantaged ESG investments
Not all ESG investments come with tax perks, but if you know what to look for, the right ones can offer powerful financial upside.
Start by evaluating sectors and asset classes with direct tax incentives. These include:
- Clean energy funds that invest in solar, wind, or battery storage infrastructure, often qualifying for the Investment Tax Credit (ITC) (IRS).
- Municipal green bonds, which may provide tax-free income while funding public infrastructure tied to environmental goals.
- Real estate projects in Qualified Opportunity Zones (QOZs), many of which focus on affordable housing, sustainable development, or revitalization of underserved communities (IRS).
- Private equity funds structured around ESG-aligned themes, such as conservation finance or regenerative agriculture, that pass through tax benefits like bonus depreciation.
You can also look for ESG opportunities through donor-advised funds (DAFs) and charitable remainder trusts (CRTs). These vehicles let you make a philanthropic impact while reducing your tax burden—often while continuing to grow your assets tax-deferred.
It’s important to conduct due diligence. Many funds label themselves “ESG” without aligning with specific tax advantages or measurable outcomes. Look for third-party verification like Watershed or Nasdaq Metrio, impact reporting, and alignment with sectors covered by current IRS rules or federal tax incentives.
Risks and red flags: ESG investing isn’t automatically a write-off
While ESG investing can offer tax advantages, assuming every ESG-labeled investment is financially or fiscally beneficial is a mistake. The ESG label lacks standardization, and some funds may overpromise on impact or tax efficiency while underdelivering on returns.
One risk is greenwashing—when companies or funds market themselves as ESG-aligned without meaningful action or disclosures. The SEC has cracked down on greenwashing in recent years, investigating asset managers for misrepresenting ESG credentials. If you’re investing for both returns and tax strategy, transparency matters.
Another concern: liquidity and complexity. ESG-themed investments in private markets—like renewable infrastructure partnerships or conservation easements—may carry longer holding periods, regulatory risk, or illiquid structures. These may delay your ability to claim deductions or defer capital gains, particularly if your financial situation changes.
Lastly, tax incentives may shift with changing legislation. For instance, some provisions in the Inflation Reduction Act—including bonus credits for clean energy projects in low-income areas—require careful compliance to qualify. Miss a step, and the expected tax break could vanish.
Long-term strategy: Aligning values, growth, and taxes
Remember, the smartest ESG investors aren’t chasing headlines. They’re building portfolios that reflect long-term priorities: resilient growth, tax efficiency, and personal values.
That strategy starts with defining what ESG factors matter to you and working with a financial or tax advisor who can connect those priorities to real opportunities. Whether it’s investing in a solar fund with direct tax credits or reallocating to ETFs with favorable capital gains treatment, thoughtful planning is key.
Think of ESG as a filter, not an end destination. Used properly, it can help you sidestep poorly governed companies, identify future-proof sectors, qualify for tax benefits, and aligned with your worldview.
A values-aligned portfolio, when paired with tax-savvy guidance, can also mean solid financial returns.
Get started with Harness
If you’re ready to integrate ESG into your tax strategy, Harness makes it easy to take the first step. Our platform connects you with vetted financial and tax advisors who understand how to align your investment goals with impact—and real tax benefits.
No matter if you’re looking to unlock deductions through clean energy funds, rebalance out of underperforming ESG positions, or simply understand how the Missouri ruling affects your portfolio, Harness can help. Our tools make it easier to track net worth, evaluate tax-advantaged investments, and collaborate with advisors who get the full picture. Get started with Harness today.
Disclaimer:
Tax related products and services provided through Harness Tax LLC. Harness Tax LLC is affiliated with Harness Wealth Advisers LLC, collectively referred to as “Harness Wealth”. Harness Wealth Advisers LLC is a paid promoter, internet registered investment adviser. Registration does not imply a certain level of skill or training. This article should not be considered tax or legal advice and is provided for informational purposes only. Please consult a tax and/or legal professional for advice specific to your individual circumstances. This article is a product of Harness Tax LLC.
Content was prepared by a third-party provider and not the adviser. Content should not be regarded as a complete analysis of the subjects discussed. Although we believe the content is reliable, it is not guaranteed as to accuracy and does not purport to be complete nor is it intended to be the primary basis for financial or tax decisions.