ESG investing is falling out of favor as two-thirds say greenwashing is a major concern

Fewer and fewer retail investors are considering ESG when making investments, and their numbers are being affected 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 Companies’ annual tracker.

In 2022, about 60 percent said they were considering these issues, while 66 percent did so in 2021.

ESG investors focus on supporting companies that have a sustainable or ethical impact, and on how the company’s management creates positive change and is transparent and accountable.

The data shows that the decline stems from concerns about performance, with only 17 percent of investors expecting ESG to improve the performance of their investments, compared to 22 percent a year ago.

‘I want to do well and from that perspective I understand ESG, but it has to be a balance between that and achieving returns. That’s why we invest,” one investor told the AIC.

According to the Investment Association, there was a net outflow of £342 million from ESG funds in August, as well as an outflow of £390 million in July.

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

“That doesn’t mean they reject it entirely, though. To extend the metaphor, they think about which parts of ESG they like and which they don’t, and decide whether they want to make it a longer-term relationship.”

Only 37 percent said they consider each of these factors important, while only 28 percent consider social issues when investing.

Investors are increasingly focusing on the governance side of ESG, moving away from environmental concerns.

One investor said: ‘If there isn’t good governance, you shouldn’t invest in it. If management is bad, it will lead to disaster.”

Reflecting the shifting focus on the environment, next month’s COP29 conference in Baku is expected to attract around 40,000 visitors, up from 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 increased in importance for investors.

“Investors are getting smarter and recognizing that governance is the foundation of ESG investing: in other words, you need the G before you can have the E and the S,” Britton said.

“While passion 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 are not as committed, it would be more accurate to describe them as skeptical, disinterested, or prioritizing investment performance over ESG issues.’

Unsurprisingly, the decline in ESG interest is less pronounced among younger investors, with 53 percent of those under 45 still considering ESG when investing, compared to 43 percent of those over 65.

About 31 percent of older investors say they associate ESG with being “woke,” compared to 13 percent of younger investors.

However, on average, a quarter of investors made the ‘woke’ association, with nine percent believing that it is pointless to take ESG into account when investing.

Among those unconvinced of the benefits of ESG considerations are likely to be those concerned about greenwashing by companies claiming to be sustainable, which appears to be an ongoing concern.

About 67 percent said they were concerned about greenwashing, down just one percent year-over-year.

‘I feel like I assume every company is doing greenwashing to promote themselves. And as a layman you wouldn’t know if they did what they said,” one investor told the AIC.

Still, according to Reprisk, there was a 12 percent drop in the number of recorded greenwashing cases between July 2023 and July 2024, the first drop since the research firm started collecting ESG data in 2019.