ESG: How much does it really matter to investors?

7 min Read Published: 15 Nov 2021

ESG investingPrivate investors prioritise performance, charges, fund manager, and asset management company above ESG when choosing an investment, according to a survey conducted by The Association of Investment Companies (AIC).

What is ESG?

ESG stands for Environmental, Social and Corporate Governance and is the collective term used to describe how conscientious a company is in regard to its social and environmental impact. It is often used by investors to determine how ethical a firm is and if it aligns with their personal values.

  • Environmental - Takes into account the company’s impact on the planet and its inhabitants, such as carbon emissions, deforestation, and animal welfare.
  • Social - Covers matters which affect individuals, such as racial diversity, labour rights and working conditions within the company itself.
  • Corporate Governance - Includes factors such as management structure, employee relations, and executive pay.

How is ESG measured?

ESG is measured by a set of rating agencies which each use their own set of metrics to determine the perceived level of ESG compliance within a company. There is currently no industry-wide set of common standards, but there are a few large agencies - such as MSCI, Sustainalytics and Vigeo Eiris - which most firms use to obtain an ESG “rating” or “score”.

MSCI

MSCI provides ESG ratings for companies - as well as equity and fixed income securities, loans, mutual funds, ETFs and countries - on a scale of AAA to CCC, using 37 different factors which include carbon emissions, electronic waste, and tax transparency.

You can quickly find out the ESG rating of over 2,900 companies by using the MSCI ESG rating tool. For an explanation of how to get to best out of the tool, listen to Episode 329 of the Money to the Masses podcast.

Sustainalytics

Sustainalytics provides ‘ESG Risk Ratings’ on a scale from “negligible” to “severe” based on a company’s exposure to ESG “risks” and how well a company manages those risks, such as energy efficiency, bribery and corruption, and biodiversity.

Vigeo Eiris

Vigeo Eiris provides ESG scores on a scale from 0 to 100, taking into account 38 different criteria, including environmental strategy, labour rights, and audit and internal controls.

What did the survey find?

The survey by the AIC found that almost two-thirds of private investors (65%) said they prioritise performance, fees and charges, fund manager reputation, and asset management reputation before ESG when making an investment decision.

When asked what was most important to them in selecting an investment, respondents universally ranked ESG last out of the five factors. This was the case across the board - for men, women, investors under 45, and those aged 45 and over.

Among all the groups surveyed, the most important consideration was consistently an investment’s performance record, followed by fees and charges, the fund manager’s reputation, and the asset management company’s reputation.

ESG was found to be more important to women than men and those under 45 than over 45. Despite the average investor not citing ESG as a primary concern, a significant minority (26%) did rate ESG as their most important consideration, of which over half (53%) were over 45.

Respondents were asked to rank each issue on a scale of 1 to 5, where 5 meant “very important” and 1 meant “not at all important”. Check the table below to see the results for each group.

Issue All Men Women Aged under 45 Aged over 45
Performance record 4.5 4.6 4.2 4.2 4.6
Fees and charges 4.3 4.3 4.4 4.3 4.3
Fund manager’s reputation 4.1 4.1 4.0 3.9 4.2
Asset management company’s reputation 4.1 4.1 4.0 4.0 4.1
ESG factors 3.4 3.3 3.9 3.8 3.3

Why do some investors not prioritise ESG?

Although appetite for environmentally and socially conscious investments is reportedly on the rise, the AIC’s research found that over a third (35%) of respondents do not consider ESG at all when making investment decisions.

A lack of trust in ESG credentials was cited as a particular obstacle when selecting an investment, with 27% of those who do not consider ESG stating that they are not convinced by such claims, amid growing concerns over so-called “greenwashing” - where a company gives a false impression about how sustainable it really is.

The difficulty of finding out about and evaluating ESG-focused investments was noted as another barrier, with a majority (57%) of all respondents agreeing with the statement: “I am supportive of ESG investing, but I find these investments harder to research”.

However, despite increasing awareness about the climate crisis and the role that investing can play in mitigating it, 22% of investors that do not consider ESG said they simply “had not thought about it”.

How do investors think ESG affects investments?

The AIC’s survey also illuminated how private investors expect ESG investing will affect the performance, risk and fees of their investments.

33% said they believe that investing with ESG in mind is likely to improve performance, while 20% conversely said they think it is likely to have a negative impact. However, 29% thought that ESG would have no overall impact on an investment’s performance.

Views on risk were also mixed, with 20% believing ESG investing is likely to be lower-risk overall, while 23% said it would be higher-risk and 43% thought it would have no overall impact.

However, when it comes to fees and charges, investors’ thoughts are much clearer. Only 10% of investors believe ESG investing comes with lower charges, with a significant 43% saying it will lead to higher charges - although 36% expect no overall impact.

How to invest with ESG in mind

If you are considering incorporating ESG into your investments, check out the following articles:

You can also listen to Podcast Episode 299 – Ethical & Sustainable Investing: Can it improve the world and your wealth?