What investors want from ESG funds

In the rapidly evolving world of Environmental, Social, and Governance (ESG) investing, understanding investor preferences is crucial to the investment industry. Our latest research reveals a complex picture of what investors truly want from ESG products, highlighting areas of both consensus and divergence across different markets.

Aligning investments with personal ethics

As previously discussed, one interesting finding from our survey is the strong desire among investors to align their investments with their personal values and ethical principles. Across Europe and Asia, a significant portion of investors - 65% in Europe and 71% in Asia - agreed that their personal ethical views should be taken into consideration when making an investment decision.

This desire for ethical alignment extends beyond mere preference; it's becoming a key factor in investment decisions. Even as fees and flexibility remain top priorities, the ethical dimension of investments continues to be important for investors. This trend suggests that the investment industry needs to develop products that cater to a range of investor values, while still meeting traditional investment criteria.

A call for transparency and consistent regulation

One of the most significant demands from investors is for greater transparency in ESG investing. Our research shows a clear majority of investors across both Europe and Asia agreeing that ESG funds should provide detailed disclosures about their investments, strategies, and performance metrics.

Interestingly, our survey reveals a substantial number of investors who are not willing to invest in funds that don't meet sufficient ESG regulatory reporting standards. This stance underscores the importance of a robust and consistent regulatory framework for ESG investing.

Investors are calling for:

1. Clear disclosure of specific ESG measures and indicators
2. Consistent reporting across the companies held by ESG funds
3. Mandatory detailed information on company performance against ESG criteria

This demand for transparency extends to concerns about greenwashing. With 64% of European investors and 77% of Asian investors expressing concern about potential mis-selling of ESG funds, it's clear that the industry needs to address these worries head on.

Exclusions: Where investors draw the line

When it comes to what should be excluded from ESG funds, our research shows both consensus and divergence among investors. Across both Europe and Asia, there's strong agreement that certain industries should not be included in ESG funds, such as deforestation, pornography, weapons manufacturing and heavily polluting industries.

However, regional differences emerge in other areas. For instance, the acceptability of ESG investments in the palm oil industry varies, with stronger attitudes against this sector found in Europe (50%) compared to Asia (37%).

While investors have clear views on exclusions, there's also recognition of the need to support transition in certain industries. This presents a challenge for ESG fund managers: how to balance exclusions with the desire to invest in companies that are actively transitioning to more sustainable practices?

Our research suggests that investors are open to nuanced approaches. For example, while many investors feel that heavily polluting industries should be excluded, there's also an understanding that some of these companies might require investment in order to transition to cleaner practices and in such cases could be included in ESG portfolios. For example, 60% of investors globally agree that an Oil, Gas or Mining company investing in renewable technologies, to reduce future carbon emissions and transition to a more sustainable future, could be included within an ESG fund. This highlights the need for clear communication from fund managers about their strategy for supporting transition, while maintaining their ESG principles.

The industry's response: a call for clearer product disclosures

Given these findings, it's clear that the investment industry needs to step up its efforts in providing clearer, more comprehensive disclosures about ESG products. This would include:

1. Detailed information about ESG criteria and how they're applied
2. Clear communication about exclusion and inclusion strategies
3. Transparent reporting on the ESG performance of portfolio companies
4. Regular updates on how funds are supporting transition in various industries

By providing this level of transparency and detail, the industry can help bridge the gap between investor expectations and the realities of ESG investing. This will not only help build trust but also enable investors to make more informed decisions, aligned with their personal values and financial goals.