AIC: ESG Investing Trends Diverge in 2024

ESG: environmental, social, governance. These three words have been front and centre in the minds of business leaders for two decades.

In 2004, the United Nations commissioned a report entitled 'Who Cares Wins', which is when the acronym was first introduced to the world en masse.

The report made a convincing connection between sustainability and profitability. It argued that “successful investment depends on a vibrant economy, which depends on a healthy civil society, which is ultimately dependent on a sustainable planet.”

With this simple sentence, businesses were hooked.

By 2014, the theories were producing tangible results. Authors from the University of Oxford and Arabesque Partners published a report showcasing the excellent results of businesses that had adopted strong ESG principles.

The following year, the UN created the Paris Agreement and introduced the Sustainable Development Goals, two all encompassing pieces of sustainability legislation. With these two accords, businesses took on a huge responsibility, meaning that sustainability was more of an imperative than ever.

The amount of ESG professionals boomed thereafter and job titles like Head of ESG were created by businesses who wanted a sharp focus on sustainable performance.

Those businesses that took ESG seriously were seen as future-proofed, forward thinking enterprises, ready to transition away from the mistakes of the past. As such, they became much more attractive to investors. With this preference made clear, all businesses began scrabbling to reach the same benchmark, lest they be left behind.

So why now, in 2024, does it seem as though investors are losing interest in the ESG credentials of businesses?

The newest data on investor belief in ESG

The Association of Investment Companies (AIC) produces an annual 'ESG tracker', surveying the sentiments of businesses and investors alike. In its recently published report for 2024, the AIC shows that investor interest in ESG has fallen for the third consecutive year.

The survey, which polled 400 investors and 202 intermediaries, reveals a steady decline in those considering ESG factors when investing, dropping from 66% in 2021 to 48% in 2024.

Performance concerns are at the heart of this shift, with only 17% of respondents believing ESG investing is likely to improve returns, down from 22% last year. The report shares an interesting contribution from one surveyed investor, who says: "I want to do good, but it has to be a balance between that and getting returns."

So, where is the direct correlation between sustainability and profitability that was so widely reported a decade ago? Are investors reticent to have their money spent on businesses in the tricky transition to net zero?

Why are investors less concerned about ESG nowadays?

Nick Britton, research director of the AIC, offers insight into this growing (or shrinking) trend.

He says: "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 are thinking about the bits of ESG they like and those they don't, and deciding if they want to make this a longer-term relationship."

Despite the overall trend, the 'G' in ESG is gaining prominence. Environmental and governance issues are now tied at 37% in terms of importance for investors, with social aspects lagging behind.

Transparency and disclosure have emerged as the top ESG consideration, with 60% of respondents deeming it crucial when investing. Climate change has slipped to second place, followed by pollution, human rights and waste management.

An ESG culture war

Woke (to be aware of or engaged with social problems) is often used as a pejorative term nowadays. Presumably, investors who view ESG as a pursuit of the woke believe that spending time and money on environmental and social endeavours is inefficient or virtue signalling.

Larry Fink, CEO of BlackRock, was one notable executive that railed against ESG, saying that the term had become "weaponised".

Does this kind of discourse poses a threat to the future of sustainable business? Organisations the size of BlackRock shoulder huge responsibility in the pursuit of a better world, and rightfully so.

The late founder of British cosmetic giant The Body Shop, Anita Roddick, summarised the role businesses have in shaping the world very well. She said: "The business of business should not be about money, it should be about responsibility. It should be about public good, not private greed."

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