The popularity of ESG investing is declining since the heady days of 2021, though a majority of private investors (53%) still say they consider ESG factors when investing, according to the annual ESG Attitudes Tracker from the Association of Investment Companies (AIC).
In 2021, almost two-thirds of respondents (65%) said they considered ESG when investing. This fell to 60% in 2022, and 53% this year, according to the research conducted by Research in Finance.
All three elements of ESG – environmental, social and governance – have declined in importance since last year, with environmental factors remaining the most important to private investors.
Source: AIC/Research in Finance
Greenwashing fears grow
Among the 47% of investors who do not consider ESG factors when investing, the top reason given is that these investors prioritise performance over ESG issues. However, not being convinced by ESG claims from asset managers is a close second.
A majority of all respondents (63%) say they are concerned about greenwashing, and it appears these fears have grown.
In the 2021 survey, 48% of respondents agreed with the statement “I’m not convinced by ESG claims from funds”. This rose to 58% in 2022 and hit 63% in this year’s survey, showing that the investment industry has a long way to go before investors trust what they are being told about ESG.
Richard Stone, Chief Executive of the Association of Investment Companies (AIC), said: “Our ESG Attitudes Tracker suggests that 2021 may have been a high point for enthusiasm about ESG investing. There is plenty of residual support for the concept, but concerns about greenwashing are increasingly dominating private investors’ mindsets.
“These findings underline the importance of the regulator getting disclosure rules right, in particular the new labelling regime. A new regime with high standards that investors can rely on is essential for helping investors who care about ESG find products that align with their values and beliefs.”
Have investors just stopped caring?
The percentage of investors who say sustainability is important to them in their everyday life has barely changed since 2021. It was 69% in that year, fell to 64% in 2022, but recovered to 68% this year.
Aside from greenwashing concerns, the poorer performance of “ESG” mandates over the last two years may also have had an impact. Only 22% of investors now think ESG investing is likely to improve performance compared to 33% in 2021, and 24% think it will hurt performance versus 20% two years ago.
The survey was accompanied by in-depth interviews. One 44-year-old investor said of their ESG investments: “I just thought this just isn’t for me. They weren’t producing the returns that I was looking for, so I felt I’d rather do my bit for society by buying more fair-trade goods, by recycling even more, helping local society and local charitable events.”
ESG investing is also seen as risky by some investors. Nearly a third (30%) of respondents think it is likely to lead to higher risk, versus 14% who think it will lead to lower risk.
Another investor said: “The ESG funds I invested in were underperforming and at my age, 70, I need to maximise my returns and I cannot take unnecessary risks. I contribute to ESG by my own lifestyle.”
Not everyone is pessimistic
Not everyone feels the same. One investor said: “A year ago I was 100% committed to performance. I now increasingly consider the wider world and wish to make more of a contribution if only by example.”
Another commented: “I believe that greenwashing has been addressed to some extent – and at least many more are wise to it.”
When respondents were asked what should be done to address greenwashing, common answers included standardised verification by a reputable third party, greater transparency, and industry regulation.
One 59-year-old investor said: “If you’re going to be comparing one fund with another, then there needs to be standards. You can’t let each and every one have their own definition.”
“Something major needs to change”
There is also a minority of investors for whom ESG issues are extremely important. When asked whether they agreed with the statement “I’m a fan of investments that consider ESG factors”, nearly a fifth (19%) strongly agreed.
One 70-year-old investor said: “I am a very strong believer in the fact that something major needs to change. I’m not a climate denier. I think we’ve got an absolutely mega problem coming up. Not for my generation, but certainly for the ones that follow us. In a way, ESG is the only way that normal investors can impact on the big problems.”
