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Fewer and fewer private investors take ESG criteria into account when making investments, and this figure is influenced by this drop for the third consecutive year.
Only 48 percent of investors now say they consider environmental, social and governance (ESG) when making investment decisions, down from 53 percent in 2023, according to the Association of Investment Firms’ annual tracker.
In 2022, about 60 percent said they considered these questions, while 66 percent did so in 2021.
Sustainable: Fewer investors back ESG-driven investments, and ESG funds face significant capital outflows
ESG investors focus on backing companies that have an ethical or sustainable impact, as well as how company management drives positive change and is transparent and accountable.
The data reveals that the drop is due to performance concerns: only 17 percent of investors expect ESG criteria to improve the performance of their investments, compared to 22 percent a year ago.
‘I want to do good and I understand ESG from that point of view, but there has to be a balance between that and making a profit. That’s why we invested,” one investor told AIC.
According to the Investment Association, there were net outflows of £342m from ESG funds in August, as well as outflows of £390m in July.
Nick Britton, research director at the AIC, said: “Our ESG attitudes tracker shows that investor love for ESG investing continues to cool.”
‘However, that doesn’t mean they reject it completely. To extend the metaphor, they are thinking about the parts of ESG they like and don’t like, and deciding whether they want to make this a long-term relationship.”
Only 37 percent said they consider each of them important, and only 28 percent consider social issues when investing.
Increasingly, investors are focusing on the governance aspect of ESG criteria, having overtaken environmental concerns.
One investor said: ‘If it doesn’t have good governance, you really shouldn’t invest in it. If management is bad, disaster will occur.’
Reflecting the shift in focus away from environmental concerns, next month’s COP29 conference in Baku is expected to attract around 40,000 attendees, compared to the 84,000 who attended last year’s COP28 in Dubai.
‘An interesting aspect of this year’s research is that almost all governance issues have gained importance for investors.
“Investors are getting smarter and recognizing that governance is the foundation of ESG investing – put another way, you need the G before you can have the E and the S,” Britton said.
“While passions over ESG may have cooled, our research also suggests that love has not turned to hate.
“Few investors are actively hostile to ESG criteria: for those who are not as committed, it would be more accurate to describe them as skeptical, disinterested, or prioritizing investment performance over ESG issues.”
Unsurprisingly, the drop in ESG interest is less pronounced among younger investors: 53 percent of those under 45 still consider ESG criteria when investing, compared to 43 percent of those over 65 years.
In fact, about 31 percent of older investors said they associated ESG criteria with being “woke,” compared to 13 percent of younger investors.
However, on average, a quarter of investors made the association “woke”, and nine percent believe that it makes no sense to take ESG criteria into account when investing.
Among those unconvinced of the merits of ESG consideration are likely those concerned about greenwashing by companies claiming to be sustainable, which appears to be a persistent concern.
About 67 percent said they were concerned about greenwashing, down just one percent year over year.
‘I feel like I would assume that all companies are doing a greenwash to promote themselves. And as a layman you wouldn’t know if they are doing what they say,” one investor told AIC.
Still, according to Reprisk, there was a 12 percent decline in recorded cases of greenwashing between July 2023 and July 2024, marking the first decline since the research firm began collecting ESG data in 2019.
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