Sustainable Investing: Navigating the evolution towards a more responsible future

In recent years, Environmental, Social, and Governance (ESG) investing has taken centre stage in the world of finance.

It seemed like many financial advisers and fund distributors were eager to tout their commitment to responsible and sustainable investment. However, as time has passed, it could be argued that the landscape of ESG investing appears to be shifting.

Some are questioning whether there is a move away from ESG investing within the financial advisory and fund distribution industries and whether it remains as important as it once was.

The rise of ESG investing

The original version ESG investing gained momentum in the early 2000s as investors increasingly recognised the importance of aligning their financial goals with their values through Socially Responsible Investments (SRI). Only as a next step the idea behind ESG investing started to flourish, where environmental, social, and governance factors are considered when making investment decisions. This next step and paradigm shift moved ESG Investing into risk management.

The real breakthrough and importance for ESG finally happened in the last years. With increasing awareness for climate change and biodiversity loss more and more fund managers and regulators started to dig deeper into this topic. From the original start in the early 2000s to the topic of sustainable investments as we know it today, we have seen various changes. And while ESG investing originally was very strongly tied to risk management it moved increasingly into the centre of sustainable investing.

For a while, it seemed like ESG was not just a trend but a fundamental shift in the investment landscape. Financial advisers and fund distributors eagerly embraced ESG, offering a wide range of products and services designed to cater to this growing demand. Major institutions integrated ESG criteria into their investment strategies, and ESG funds saw substantial inflows of capital.

The potential move away from the term ESG investing

However, more recently, there have been signs of a potential shift away from the ESG fervor. Several factors contribute to this changing landscape:

Critics argue that ESG Ratings are subjective and not always correlated with one another. The rise of ESG has also led to concerns about greenwashing. As a result, some financial advisers and fund distributors are becoming more sceptical and cautious about ESG claims.

Another cause for hitting the pause button is the ever-changing regulatory landscape which influences ESG investing. Governments and regulatory bodies may introduce new rules and standards that impact the way ESG investments are assessed and marketed.

Finally, there is the very real prospect that the market is becoming too saturated. As ESG investing became increasingly sought after with the proliferation of ESG funds and products, the market has become increasingly crowded. This saturation can make it challenging for financial advisers to differentiate between ESG offerings, potentially leading to a reassessment of priorities.

The future of ESG investing

While there may be a trend away from the euphoria surrounding ESG investing, it's essential to recognise that ESG principles are not going away. Instead, the industry is evolving and maturing.

To that end, ESG data and metrics are likely to become more standardised and dependable over time. This could alleviate concerns about greenwashing and enhance the performance evaluation of ESG investments.

Furthermore, ESG considerations will become an integral part of mainstream investing rather than a separate category in itself. Financial advisers and fund distributors will incorporate ESG factors into their investment processes without necessarily marketing them as "ESG investments." Investing in an ESG manner may just become part of everyday investment practice rather than something that needs its own label.

Investors may also demand more customised sustainability solutions that align with their specific values and priorities. Financial advisers may need to offer tailored sustainability portfolios to meet individual client needs.

Finally, governments and regulatory bodies are playing a more significant role in defining ESG standards and enforcing transparency. This provides greater clarity and credibility to the ESG space.

The landscape of ESG investing is undoubtedly evolving, with some indications of a shift away from the initial fervor. It will further require change and more specific terms.

However, it would be premature to declare the end of ESG investing's importance. Instead, we are likely witnessing a maturation process, where ESG factors continue to play a significant role in the financial advisory and fund distribution industries, albeit in a more nuanced and refined manner.

As the industry adapts to address performance concerns, combat greenwashing, and respond to regulatory changes, ESG investing may find a more stable and sustainable footing in the investment world.

The future will likely see a more sophisticated approach to ESG, where financial advisers and fund distributors balance the pursuit of financial returns with a commitment to environmental, social, and governance principles, ultimately striving for a more responsible and ethical financial landscape.

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Dr. Matthias Breier, Head of ESG Product, FE fundinfo

This article first appeared in ESG Clarity on 6 October 2023