Responsible investing has gained momentum, with investors eager to align their portfolios with environmental, social, and governance (ESG) values. However, concerns are emerging that "greenwashing" might undermine responsible investing. A survey by the Association of Investment Companies found that just 53 percent of respondents consider ESG factors when investing, down from 60 percent last year and 65 percent in 2021.
These findings coincide with reports of record net outflows, totalling £448 million, from responsible investments in August. While 68 percent of respondents view sustainability as vital, scepticism is growing regarding whether ESG funds live up to their claims. Nearly two-thirds (63 percent) of those surveyed express doubts about ESG claims, up from 58 percent the previous year and 48 percent in 2021.
Richard Stone, CEO of the Association of Investment Companies, suggests that 2021 may have been the zenith of enthusiasm for ESG investing. He underscores that concerns about greenwashing now dominate private investors' thoughts. Respondents are urging more transparency, industry regulation, and standardised verification by reputable third parties to combat greenwashing.
These findings underscore the need for effective disclosure rules, particularly in the context of the new labelling regime. A robust regulatory framework is essential for ESG-focused investors to find products that align with their values and principles.
The survey also reveals that among those who do not consider ESG factors, 56 percent prioritise financial performance. Another 17 percent rarely think about ESG, indicating that some investors prioritise returns over principles.
The survey suggests that perceptions of ESG investment performance and risk have diminished over the past two years. Only 22 percent believe ESG investing is likely to improve performance, down from 33 percent in 2021. Additionally, 24 percent now believe ESG investments could worsen performance, potentially contributing to recent outflows from ESG funds.
Despite these challenges, responsible investment funds undermanagement reached £96 billion at the end of August, representing a 6.9 percent share of industry funds under management. This demonstrates continuing support for responsible investing.
The Transparency Challenge
ESG underscores transparency, but issues persist:
Lack of Standardised Reporting & Verification
The absence of standardised reporting and verification across the ESG landscape makes it difficult for investors to assess a company's or fund's ESG practices.
Inadequate Regulation
Weak regulation permits vague or misleading ESG claims.
Weak Enforcement
Even when regulations exist, enforcement can be lacking, allowing greenwashing to continue.
Lack of Universal Standards
The absence of a universal standard adds uncertainty and inconsistency to ESG assessments.
Subjectivity
ESG complexity results in unique nuances, leading some businesses to prioritise compliance over meaningful action, resulting in misleading claims.
While ESG is relatively new, addressing these challenges is crucial to maintain the integrity of responsible investing and ensure it delivers on its promise of positive change.
Declining enthusiasm for ESG investments and growing greenwashing concerns highlight the need for transparency, standardised reporting, and robust regulation in responsible investing. Investors must trust that their ESG investments align with their values, and companies and funds must be accountable for their sustainability claims. As the ESG landscape evolves, addressing these challenges is essential to ensure responsible investing delivers on its promise of creating positive change.
