EY Report: Are Investors Caring Less About Sustainability?

A worrying decline in investor commitment to sustainability is exposed by the EY 2024 Institutional Investor Survey.

The survey, which draws on the views of 350 investment decision-makers from institutions including asset management firms, insurers, pension funds and wealth management companies, charts investor sentiment about ESG performance.

It says that, in the last 10 years, the trend has been “continuously upward”, with investors “increasingly seeming to care about and embed ESG into their decision-making”.

But this survey suggests there is a "pronounced gap between what they say and what they’re doing”.

What does the survey say?

The report’s co-author Matthew Bell, Global Leader, Climate Change & Sustainability Services, EY, said on LinkedIn: “We began surveying the industry well over a decade ago with an ever-increasing trend toward investors saying ESG was fundamental to their decision-making.

“However, this year I wanted us to critically assess whether what they'd been telling us is what is happening in practice.

“It's fair to say our intuition was right: there is a significant say-do gap.”

Figures supporting that feeling include:

• While 88% of investors surveyed have increased their use of ESG information, 92% worry that ESG-related initiatives harm short-term corporate performance
• Despite the rise of sustainability reporting, 66% of investors say their institution is likely to decrease its consideration of ESG in decision-making
• Nearly two-thirds (63%) of investors surveyed say that shifts in the business cycle is the factor that will most acutely or substantially affect their institution’s investment strategy over the next two years
• 85% of investors say that greenwashing is a worsening problem, but 93% are confident that companies will meet their sustainability targets.

The report's introduction says: “What’s more, there is little sign that investors intend to prioritize ESG investments more strongly in their capital allocation strategies in the immediate future. In fact, the research implies the opposite.”

Investors face a dilemma

While the report says the findings “paint a worrying picture”, given investors’ crucial role in driving the move to a sustainable economy, it acknowledges the pressures they face.

It says: “Investors do acknowledge the economic and political importance of sustainability. They also understand that long-term value is generated by companies transitioning to more sustainable business models.

“Nevertheless, immediate macroeconomic and geopolitical pressures mean that their investment decision-making is still often geared toward short-term objectives.”

Michelle T Davies, Global Head of Sustainability (EY Law), who contributed to the report, said on LinkedIn: “It is only when we have a true understanding of the real position that we can work on better outcomes.

“The reality is that many investors and investees are facing a multitude of financial and operational challenges.

“It’s our job to find the solutions which enable them to achieve sustainability while remaining financially successful.”

Put off by greenwashing fears

Along with short-term pressures, another factor that may be contributing to the say-do gap is that investors do not necessarily trust the information being provided to them by companies, the survey finds.

This is making them cautious about allocating capital to businesses claiming sustainability credentials.

The report says: “More than four out of five investors surveyed for the research (85%) say that greenwashing and similarly misleading statements about companies’ sustainability performance is a greater problem compared with five years ago.

“This is a troubling finding, leaving us to wonder whether investor confidence in corporate sustainability information will increase as more jurisdictions move to mandatory, assured sustainability disclosures — and with reporting and sustainability standards continuing to evolve.”

Will the say-do gap narrow?

The report says it is “not clear” whether the say-do gap between what investors say about integrating sustainability into their decision-making and what they do in practice is likely to narrow.

It says investors are showing signs of sustainability fatigue and recognising the difficulties in weighing up the ESG benefits of long-term value creation where short-term corporate performance is not strong.

The picture is not consistent across the globe. In Europe, some investors are holding companies to account over targets and remuneration.

However, the report adds: “In the US, investors have grown more cautious. They have faced an anti-ESG backlash that has resulted in some pension funds being sued for breaching their fiduciary duties when considering ESG-related risks in investment decision-making.

“Additionally, there is uncertainty about the effects of an administration change in January.”

But hope springs eternal: “However, based on the 2016-2020 experience, we observed that investors continued to focus on ESG as an investment risk despite the political environment and it is anticipated this trend will likely persist.”

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