Appetite for ESG investing falls – but could tighter regulation improve its performance?

Featured in City A.M.

ESG is sliding down the list of investment priorities as investors refocus on maximising returns amid ESG’s poor performance and wider market volatility.

According to the latest research by Charles Schwab UK, in two years the number of investors who believe companies with strong Environmental, Social and Governance (ESG) credentials are attractive investment options has dropped by seven per cent, from 75 per cent to 68 per cent. 

The research reinforces claims that investors are increasingly concerned about returns amid the current market volatility. 

In 2022 investors pulled more money from funds labelled sustainable than they added for the first time in a decade. ESG funds also underperformed non-ESG funds as oil and gas companies, which are not included in ESG funds, saw massive share prices gains. 

According to Charles Schwab, the proportion of investors who prioritised ESG investments regardless of whether they underperformed dropped by eight per cent in just over a year. 

Despite the poor performance in 2022, 65 per cent still think they yield better returns – although this was down from 71 per cent in December 2021. 

Across the board, the number of investors considering ESG fell by six per cent from December 2021 to 38 per cent. 

Older investors were less likely to consider ESG with only 23 per cent of Boomers taking it into consideration. Among Millenials and Gen Z, this rose to around 50 per cent. 

Richard Flynn, managing director for Charles Schwab UK, said: “With the need to maximise returns seemingly growing in importance amid the cost-of-living crisis, fewer investors seem to be factoring in ESG-related considerations into their investment decisions.”

However, James Alexander, chief executive of UK Sustainable Investment and Finance Association, said suggested retail investors in the UK are still set on sustainability.

Referencing private polling, Alexander said “a key trend emerging (since 2010) is that savers increasingly want their investments and savings to deliver returns while also having a direct positive impact on the environment”.

The issue, Alexander argued, is that there are “a number of barriers remain” to sustainable investment. He suggested there is much more work that needed to be done to “enhance savers’ understanding and confidence in sustainable investments”.

Yann Bloch at NeoXam agreed, stressing that improvements were unlikely without more accurate data.

“To encourage major widespread confidence in funds that apply an ESG focused investing strategy, there needs to be trust in the information that is supplied to regulators and clients alike,” he said.

ESG investment has been embroiled in controversy over recent months with investors concerned that many supposedly ethical investments fail to match up to the claims made about them.

Back in March the Financial Conduct Authority (FCA) said it will take action against firms if they fail to improve performance around the accuracy of ESG claims.

Regulators around the world are trying to reform the ESG labelling market to ensure labels are more accurate and don’t mislead investors. 

The FCA’s plans have been described as “world-leading” as they will introduce a greater degree of choice to the ESG investing landscape.

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