The increase in private capital flows to the South over the last decade has stimulated an intense debate about the impacts on the development process. Whilst there is particular concern about the negative social and environmental consequences of foreign investment in resource-based sectors such as forestry, the potential contribution that private capital flows could make to sustainable development is being increasingly recognised. This discussion paper examines the issues involved in harnessing a particular type of capital flow, namely portfolio equity, to achieve sustainable development objectives. It reviews recent thinking on this issue, drawing on a case study of the forest products industry with a particular focus on companies registered in Malaysia. The case study tracks the magnitude and sources of portfolio equity flows to the forest products sector in Malaysia, discussing whether any links can be made between such flows and environmental and social performance in the sector. It then considers the justification for, and practicalities of, using portfolio investment as a form of leverage to promote best practice in the forest products sector and to discourage operations with adverse social and environmental impact.