Institutional investors retreat from ESG investing

Here’s a note from Nawar Alsaadi:

There has been a notable degradation in the degree of ESG implementation among asset owners in 2023 that went largely unnoticed.

The attached two slides (which will also be included in the upcoming State of Sustainable Business compendium) show a clear degradation in the degree of actual or intended ESG implementation by asset owners across regions YoY between 2022 and 2023. It is possible that some of this can be explained by the fact that FTSE Russell (which conducted the survey) has expanded the sample from 184 asset owners in 2022 to 350 asset owners in 2023. Nonetheless, this is a worrisome development that has not been sufficiently discussed within sustainability circles.

In terms of ESG implementation focus by asset type, fixed income remained the top asset class for current (or planned ESG integration) for a second year in a row despite a notable decline in ESG implementation in this asset class from 53% in 2023 to 45% in 2022. Meanwhile, infrastructure has eclipsed public equities by becoming the second most popular class for ESG implementation.

When thinking about ESG implementation most observers automatically think of public equities, or perhaps private equity, but these two asset classes are ranked third and fourth. Having said that, there are clear variations across markets. In EMEA and the US market, asset owners prioritize ESG implementation in infrastructure over other classes, while in APAC, fixed income wins by a large margin.

In terms of ESG integration resilience, ESG implementation in infrastructure and private equity declined the least YoY. Meanwhile, multi-asset and private real lost the most ground YoY.

It will be interesting to see how these trends will evolve in 2024, but make no mistake about it, a weaker commitment to ESG and sustainability implementation by asset owners will have negative repercussions for sustainable finance across the finance value chain.

Note: Please note that when we include ESG evaluations (a lower bar than implementation), the percentages rise to 88% in 2022 and 80% in 2023, with the most decline taking place in the United States.