Breaking Down Barriers to ESG Investing

The Environmental, Social, and Governance (ESG) investing landscape is evolving rapidly. While interest remains high, our recent survey reveals a complex picture of investor attitudes and behaviours. This article examines the key barriers facing ESG investing, as well as potential solutions for overcoming them.

The current ESG landscape

Our latest global survey finds a slight decline in ESG fund ownership, with 31% of investors holding ESG funds compared to 33% in 2021. However, those invested in ESG are allocating larger portions of their portfolios. For instance, in Spain, the percentage of ESG investors with 40% or more of their portfolio in ESG funds has increased by 10% since 2021.

Despite this increased allocation, prospects for future investment appear less optimistic than two years ago. The percentage of non-ESG investors considering adding ESG funds to their portfolio has decreased by 4% in both Europe and Asia.

Key barriers to ESG investing

So what are the main concerns holding investors back from making ESG investments? Firstly, performance concerns stand out as a primary barrier with only 37% of investors now expecting ESG funds to outperform non-ESG funds, a significant drop from 48% in 2021.

On top of performance concerns there also seems to be a significant knowledge gap for investors, with just 30% of ESG investors feeling fully aware of their funds' ESG aims and objectives. This lack of understanding extends to the specific ESG measures involved, the holdings they have in their portfolio and the impact on fees.

In addition, greenwashing concerns further complicate the picture. 71% of investors are worried about potential mis-selling of ESG funds, up from 66% in 2021. This situation is particularly pronounced in Asia, where 77% of investors express concern.

Interestingly, while fees remain a crucial consideration, 60% of investors globally said they are willing to pay higher fees for ESG funds. However, awareness of ESG fund fees appears to have decreased, with fewer investors fully aware of any fee impact compared to 2021.

Overcoming these barriers

To address these barriers, it’s clear the investment industry needs to focus on increased transparency and greater education to ensure the perception matches the reality. Investors cite improvements in transparency about where their money is invested as the top factor that would make ESG investing more attractive.

It was also interesting to see that the majority of investors said they trust ESG ratings to give them an accurate understanding of a company’s practises, as well as providing the information they need to make informed decisions in relation to ESG. So, although greenwashing concerns exist, if ratings are applied consistently this could provide some reassurance to investors.

Clearer communications explaining product aims, objectives, and methodologies are crucial, alongside providing clearer data on ESG performance and fee comparisons. Additionally, more effort is needed to educate investors on ESG themes and product characteristics.