ESG was once a key aspect of investing. However, as investors increasingly shift their focus elsewhere, investment strategists are looking into why it seems to be in decline. Lydia Reynard, Associate Director of Investment Management at Arbuthnot Latham comments:
“Broader client interest in ESG does appear to have fallen over the last couple of years which is reflected in the fall in sustainable fund flows and new product launches. However, we have found flows into our sustainable service managed on behalf of private clients remain steady through this same period.
“There are a few factors at play which could explain this drop off in broader market demand for ESG investments, notably:
- Performance
- Policy
- Individual company commitment.
“We saw ESG investments really gain traction in 2021 following a period of strong performance. However, these funds have struggled to keep pace with their unconstrained equivalents since then, particularly multi asset funds through the market downturn 2022, which may have put off investors focused on comparable returns.
“This downturn in relative performance has corresponded with a reduction in government commitments and targets focused on the ESG agenda, at both a national and supranational level. Notably, we are seeing debate across the EU and UK whether to soften the criteria around the commitment to sell only electric vehicles to include hybrids due to cost and infrastructure concerns. If financial subsidies and investment are expected to fall, this weakens the case for ESG investors, which are relying on strong government backing.
“Over the past couple of years, we have seen a number of high-profile companies either dropping or amending their ESG commitments or accused of greenwashing once put under greater scrutiny. As an example, Microsoft was put under the microscope earlier this year, as the business decided to disband its Diversity, Equity and Inclusion (“DEI”) team as management felt it was no longer necessary. This may have dented confidence and created an air of mistrust deterring potential investors into ESG.”
[1] In 2024 we saw just 246 new fund launches up to the end of Q3 compared to 444 over the same period last year. Source: Morningstar, Global Sustainable Fund Flows: Q3 2024 in Review | Morningstar
