Are ESG Credentials Still Important to Investors?

Over the past two decades, the investment landscape has been significantly shaped by the principles of ESG.

Initially popularised by the 2004 United Nations report Who Cares Wins, ESG sought to link sustainability with profitability, compelling that "successful investment depends on a vibrant economy, which depends on a healthy civil society, which is ultimately dependent on a sustainable planet."

This idea gained traction among businesses and investors, establishing ESG as a central pillar in decision-making processes.

By 2014, research from the University of Oxford and Arabesque Partners validated the effectiveness of ESG principles, demonstrating that companies committed to these practices saw tangible financial benefits.

With the introduction of the Paris Agreement and the United Nations' Sustainable Development Goals in 2015, the adoption of ESG became a preference and a necessity for businesses looking to stay ahead of the curve.

The rise and fall of ESG

Businesses that integrated ESG principles were often regarded as forward-thinking and future-proof, gaining favour with investors. Job roles like "Head of ESG" became commonplace as companies sought to align themselves with the emerging trend.

Fast forward to 2024; investor enthusiasm for ESG appears to have waned.

The latest findings from the Association of Investment Companies (AIC) reveal a decline in investor interest in ESG credentials for the third consecutive year. According to the AIC's 2024 ESG Tracker, the percentage of investors considering ESG factors when making investment decisions has dropped from 66% in 2021 to 48% in 2024.

Investor performance concerns and changing priorities

Performance concerns seem to be driving this shift in sentiment. Only 17% of investors in the AIC's survey believe that ESG investments are likely to improve returns, a decrease from 22% the previous year.

One investor noted, "I want to do good, but there has to be a balance between that and getting returns."

The sentiment reflects a growing scepticism about the direct correlation between sustainability and profitability that was so widely accepted a decade ago.

Nick Britton, Research Director at the AIC, provided further insight into this trend, stating, "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 think about the bits of ESG they like and those they don't and decide if they want to make this a longer-term relationship."

Governance gains ground

Interestingly, while enthusiasm for ESG may diminish, governance issues are gaining prominence. The AIC's survey indicates that environmental and governance considerations are now tied, with 37% of investors deeming them crucial, while social issues lag.

Transparency and disclosure have become top priorities, with 60% of respondents highlighting their importance when making investment decisions.

The divergence in focus among investors suggests that not everyone is disinterested in ESG; priorities vary depending on individual values and financial objectives. For instance, the survey found that 53% of investors under 45 consider ESG factors, compared to only 43% of those aged 65 and above.

The "woke" debate and ESG's future

The term "woke," which originally meant being aware of social issues, has taken on a pejorative tone for some investors. Many view ESG efforts as mere virtue signalling rather than meaningful change. The scepticism has led to a perception that pursuing ESG initiatives may be inefficient or detrimental to business goals.

Larry Fink, CEO of BlackRock, voiced his concerns about the term ESG becoming "weaponised," highlighting the contentious nature of the debate surrounding these principles.

Despite the backlash, sustainable business remains a priority for many who believe organisations must focus on responsibility beyond profits.

As Anita Roddick, the late Founder of The Body Shop, once said, "The business of business should not be about money; it should be about responsibility. It should be about public good, not private greed."

Looking ahead: A nuanced approach to ESG

While the allure of ESG investing may be fading, the focus on sustainability is far from gone. The AIC emphasises the need for a balanced perspective, suggesting investors are more sceptical than hostile toward ESG.

As Nick Britton pointed out, "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."

As green technologies and climate-centric businesses grow, we may see ESG principles woven more seamlessly into the fabric of global business strategies. Although investor passion for ESG may have cooled, the hope remains that businesses will stay committed to making a positive impact on society and the environment.

In an evolving landscape, the question remains: Will ESG credentials regain their significance for investors in the future, or will profitability always come first? The answer may depend on sustainable business practices' continued innovation and success.

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