ESG traders fall for third consecutive 12 months as returns take focus

Fewer private investors are considering ESG when making investments, with the number being influenced by this falling for a third consecutive year.

Just 48 per cent of investors now say they consider environmental, social, and governance (ESG) when making investment decisions, falling from 53 per cent in 2023, according to the Association of Investment Companies’ annual tracker.

In 2022, some 60 per cent said they considered these issues, whereas 66 per cent did so in 2021.

Sustainable: Fewer investors are backing ESG-led investments, with ESG funds facing considerable outflows

ESG investors focus on backing companies that have a sustainable or ethical impact, as well as how the firm’s management drives positive change and is transparent and accountable.

The data reveals that the fall stems from concerns regarding performance, with as little as 17 per cent of investors expecting ESG to improve the performance of their investments, falling from 22 per cent a year ago.

‘I want to do good, and I understand ESG from that point of view, but it has to be a balance between that and getting returns. That is why we invest,’ one investor told the AIC.

According to the Investment Association, there were net outflows of £342million from ESG funds in August, as well as outflows of £390million in July.

Nick Britton, research director at the AIC, said: ‘Our ESG attitudes tracker shows that investors’ love affair with ESG investing continues to cool. 

‘That doesn’t mean they reject it altogether though. To extend the metaphor, they are thinking about the bits of ESG they like and those they don’t, and deciding if they want to make this a longer-term relationship.’

Just 37 per cent said they consider each to be important, with only 28 per cent considering social issues when investing.

Increasingly, investors are focusing on the governance side of ESG, having overtaken environmental concerns.

One investor said: ‘If it hasn’t got good governance, you really shouldn’t be investing in it. If the management are poor, then it’s going to lead to a disaster.’

Reflecting the shifting focus away from environmental concerns, next month’s COP29 conference in Baku is expected to see around 40,000 attendees, compared to the 84,000 that attended last years’ COP28 in Dubai.

‘One interesting aspect of this year’s research is that almost all the governance issues have increased in importance for investors. 

‘Investors are increasingly savvy and recognise that governance is the bedrock of ESG investing: put another way, you need the G before you can have the E and the S,’ Britton said.

‘Though passions for ESG may have cooled, our research also suggests that love has not turned to hate. 

‘Few investors are actively hostile to ESG: for those who aren’t so engaged, it would be more accurate to describe them as sceptical, uninterested, or prioritising investment performance over ESG issues.’

The fall in ESG interest is unsurprisingly less pronounced among younger investors, with 53 per cent of those under 45 still considering ESG when investing, compared with 43 per cent of those over 65.

In fact, some 31 per cent of older investors said they associated ESG with being ‘woke’, compared to 13 per cent of younger investors.

On average, however, a quarter of investors made the ‘woke’ association, with nine per cent believing that it is pointless to take ESG into account when investing.

Among those unconvinced by the merits of ESG consideration, are likely those concerned about greenwashing by firms claiming to be sustainable, which appears to be a persistent worry.

Some 67 per cent said they are concerned about greenwashing, down just one per cent year-on-year.

‘I feel like I would assume every company is greenwashing to promote themselves. And as a lay person, you wouldn’t know whether they were doing what they are saying,’ an investor told the AIC.

Even so, according to Reprisk, there was a 12 per cent decrease in recorded cases of greenwashing between July 2023 and July 2024, marking the first decrease since the research firm began collecting data on ESG in 2019.