Investors turn their back on ESG investing amid market volatility

Investors are increasingly scrutinising sustainable investments and are unwilling to pay a premium, instead prioritising returns, according to new research.

A survey by broker Charles Schwab reveals 67 per cent of UK investors are more concerned with maximising returns on their investments rather than how sustainable they are.

It marks a 7 per cent fall in two years as investors grapple with the cost of living crisis and the erosion of their savings pots through inflation.

Not so green investment: ESG funds have been plagued with claims of greenwashing and a period of underperformance mean investors are looking elsewhere

In December 2021, 55 per cent of investors prioritised investments adhering to environmental, social and corporate governance (ESG) principles, regardless of their performance. 

This has dropped 8 per cent in just a year, with two thirds now looking for higher returns to navigate market volatility.

Once the darling of the investment world, ESG funds have fallen out of favour this year, with investors pulling more money than they added for the first time in more than a decade.

During the pandemic, investors were driven by ESG, but sentiment has soured since the price of natural resources and prices have started to recover.

ESG funds have also suffered from the pivot to value stocks as interest rates rise because they invest heavily in growth sectors. 

A number of popular ESG funds hold huge tech companies like Microsoft within their portfolio, making it difficult to avoid the impact of the tech rout.

Just 65 per cent of investors think ESG investments yield better returns, and only half of investors are willing to take on the additional fees associated with ESG funds, an 8 per cent fall from December 2021.

Last year, the global ESG fund returned -13.70 per cent while a basket of so-called sin stocks peddling tobacco and fossil fuels returned 16.3 per cent and is starting to play catch up with ESG funds over the past decade.

The number of investors who consider ESG when making new investments is also waning, and has fallen 6 per cent since December 2021 to 38 per cent.

Older investors are more sceptical of sustainable investments, with just 23 per cent of ‘Boomer’ investors likely to take ESG factors into consideration when investing. 

This is followed by 32 per cent of Gen X investors, and 49 per cent and 50 per cent of Millennial and Gen Z investors, respectively.

Interest in ESG funds has been waning for some time, largely due to the economic backdrop, but claims of greenwashing have also done little to help.

Last year, the Financial Conduct Authority announced plans to introduce new rules aimed at cracking down on ‘greenwashing’ in investment funds, including new restrictions on the use of the term ESG.

Often, but not always, funds with an ESG label are full of stocks such as global mining giants, gambling businesses, and tobacco companies.

Richard Flynn, managing director for Charles Schwab UK, said: ‘With the need to maximise returns seemingly growing in importance amid the cost-of-living crisis, fewer investors seem to be factoring in ESG-related considerations into their investment decisions.

‘The return on investment is increasingly being called into question, with the fees often associated with sustainable investments now actively discouraging investors in this current climate. 

‘It will be interesting to see how any economic rebound and reduction in inflation impacts this attitude in the coming years.’

This post first appeared on Dailymail.co.uk