Not long ago, sustainable or “responsible” investing was hailed as the future of finance. Environmental, social and governance (ESG) related funds skyrocketed in popularity and were embraced by investors and finance industry alike. Following a history of falling under a more niche category for religious orders and institutions that mandated exclusions from certain industries, responsible investing was evolving to become part of the status quo and the finance industry scrambled to meet the growing green demand.
Responsible investment products provide investors a way to align their money with their values while still growing financially. A dual mandate for your money of both purpose and profit – one should not mean you need to forsake the other. With cultural awareness around issues like climate change peaking, it seemed like the road to investing was paved green and was a positive movement in capital allocation. However, despite its initial momentum, responsible investing has faced scepticism, causing it to lose some prominence in financial markets and hurt its growing industry dominance.
The concept in theory is simple: invest in companies that prioritise and score highly on sustainability, ethical governance and social responsibility. Yet as these funds grew, so did concerns about their legitimacy. Supply grew so fast that the regulators couldn’t keep up. Thus, the industry became rife with greenwashing, a term that refers to organisations that exaggerate or falsely claim sustainability credentials. This has unfortunately eroded trust among some investors and industry players. Many realised that ESG ratings lacked standardisation and a common language, making it difficult to determine which investments were as described.
Regulatory scrutiny also played a role in ESG’s shift. Governments and financial regulators have thankfully cracked down on misleading ESG claims, demanding clearer disclosures and accountability. Indeed, a positive move for those who have the credentials and who weren’t just jumping on the green bandwagon as it gained traction. While transparency is necessary, increased oversight has caused increased cost and complexity for firms, acting as a deterrent for some.
The political landscape has further complicated ESG’s trajectory. With the well documented backlash against diversity, equity and inclusion initiatives, and rollback on environmental goals in certain regions, responsible investing has been drawn into ideological battles, with critics dismissing its value. In some markets, ESG funds have been outright rejected, adding fuel to the controversy.
To bring it back from the industry noise, investor demand is what drove the surge in available investable products and there’s a huge portion of the population that want their investments to go towards purposeful and meaningful change in the world, or not to adversely impact it. Even with the recent challenges, it has been affirmed by continued demand that if you’re fortunate enough to be in a position to invest then it doesn’t have to be controversial to choose a sustainable option.
Despite the turbulence, the appetite for and sentiment towards sustainable investing remains strong, especially among younger investors. According to a recent Morgan Stanley report, 88 per cent of investors around the world still express interest in sustainable investing, with interest levels in the US and Europe largely unchanged since late 2023. The same report highlighted that millennials and Generation Z respondents had the highest levels of interest, 97 per cent and 99 per cent respectively. This cohort has shown a consistent interest in aligning their investments with ethical and environmental values. As investors of the future, their influence could be pivotal in reshaping ESG’s roadmap, pushing for clearer regulations, stronger accountability and real measurable impact.
So, what’s next for responsible investing following its rocky road from soaring on good intentions through the various stumbling blocks? Firstly, already implemented regulatory change to prevent greenwashing and creating some standardisation of terms and naming conventions is a positive for improving legitimacy. There’s also no getting away from the fact that it can make good financial sense. Companies that prioritise low-carbon operations, social responsibility and strong governance are well positioned to outperform their competitors while enhancing portfolio risk management. On the thematic side, energy transition, which has been further fuelled by rising AI (artificial intelligence) demand is an opportunity to generate returns. In terms of performance, over time it’s been evidenced that investing responsibly does not hurt investment returns over the long run but could behave differently over the short term, for example when the price of oil surged in 2022.
We believe responsible investing will prove resilient through the challenges it faces. The fundamental idea of wanting to invest your money with purpose and for a better tomorrow should not be considered controversial, but instead common practice. For ESG to thrive, it needs some form of reset, one that prioritises transparency, measurable performance and meaningful impact over vague commitments. We maintain that the future of finance will have many shades of green and we aim to continue to be part of the responsible evolution.
