It has not gone away – and it isn’t going to

Remember when all investment conferences had to have an ESG session? Now it’s the AI session that has become mandatory, and you can get through a whole conference without hearing anyone mention the three-letter acronym that used to be on everyone’s lips.  

Granted, ESG is – or was – a nebulous concept, not only yoking together three very different sets of issues, but also tangling up the idea of doing good with the management of risk.  

But the absence of ESG from conference agendas shouldn’t lead us to think it can now safely be ignored.  

In the UK, sustainable funds have seen net inflows of £2.1bn over the past 12 months, while those not categorised as sustainable have seen net outflows of £22.5bn, according to Morningstar.  

Our ESG Attitudes Tracker suggests that investor sentiment hit rock-bottom last year but is turning round. There is even evidence that virulent anti-ESG sentiment in the US, not least from president Trump, is making some investors feel the backlash has gone too far.

And while the percentage of financial advisers and wealth managers who expect demand for ESG to increase has fallen, it still outnumbers those who expect it to decline.  

Going back to that dual nature of ESG – doing good versus managing risk – it seems beyond doubt that it will survive in the latter form. Even if you agree with Milton Friedman that “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits”, you’d still be mad to ignore ESG risks that could hit the bottom line.  

Leaving that straw man to one side, what about ESG investing as a way to do good – or at least, avoid doing harm?  

Looking after number one?  

Our research demonstrates another blindingly obvious fact – that people invest to make money. Seven in 10 investors agree that “performance is more important to me than ESG issues” – only one in 10 disagrees.  

But we’re dealing with humans here, so it’s not quite that simple. When asked to rank themselves on a spectrum between prioritising values and beliefs and prioritising financial returns, 62% locate themselves at the “returns” end of the spectrum with 28% at the “values” end (our scale was designed to allow fence-sitting, an option taken by the remaining 11% of respondents). 

Meanwhile, roughly half (51%) agree that it makes them feel good to hold sustainable investments.  

There is also considerable queasiness about investing in controversial areas, such as oppressive regimes (81% of respondents exclude or try to avoid), pornography (73%) and companies involved in deforestation (76%), child labour (88%) or animal welfare violations (78%). Just over half (56%) steer clear of tobacco.  

In fact, a whopping 91% of investors have at least one controversial area they would rather not invest in. Perhaps these are hard-headed financial decisions, but I find it difficult to believe that personal values and beliefs have nothing to do with them.  

What about advisers and wealth managers? While it’s true that ESG has disappeared from their conference agendas, that’s partly because it has been absorbed into the way they work.  

Almost all (96%) of intermediaries recommend some sustainable funds. This is an all-time high. The average percentage of client assets in sustainable funds is 16%, which exactly matches the percentage of UK assets under management that Morningstar considers to have sustainability attributes.  

Most firms (81%) have offered an ESG proposition for at least three years, with half (50%) having done so for more than five years.  

While the term “ESG “ is as bland as cold porridge, nestled within it are dozens of fiery debates – about fossil fuels, diversity and inclusion, animal rights, what regimes we are and aren’t comfortable investing in.  

The idea that these debates are going to go away – let alone the focus on ESG factors in risk management – is inconceivable. In fact, the strength of the backlash against ESG in the US has only fanned the flames.  

Yes, we might stop using the three-letter acronym. Though I suspect that with all its flaws, it is just too handy for us to give up.  

But even if we do throw “ESG” in the dustbin of history, we are still going to be talking about ESG – and its relevance to investing – for the rest of our careers.