ESG factors are playing an increasingly diminished role in the investment decisions of institutional parties. For the vast majority, short-term performance takes precedence over the long-term benefits of sustainable investing.
This trend is highlighted in the EY 2024 Institutional Investor Survey, which polled the views of 350 institutional investors globally, including fund houses, pension funds, and insurers.
Institutional investors appear to be progressively shifting their focus away from sustainability. Despite growing societal awareness of sustainability issues, two-thirds of investors stated that their organisations are likely to place less emphasis on ESG factors in future investment decisions.
Nine out of ten investors indicated that the risks to short-term performance outweigh the long-term benefits of ESG investments.
A growing divide
These findings paint a “concerning picture,” say Matthew Bell and Ben Taylor, advisors specialising in climate and sustainability issues at EY. “Investors play a crucial role in the transition to a more sustainable economy.”
According to EY, which cites data from the Energy Transitions Commission, an average annual global capital investment of 3.5 trillion dollar is needed to achieve the energy transition required for a net-zero economy by the middle of this century.
In 2022, EY’s comparable research found that 78 percent of investors believed companies should invest in ESG issues, even if it meant short-term profitability would suffer. At the same time, roughly half of portfolio companies reported feeling pressure from investors to prioritise short-term profits, which hampers long-term investments in sustainability.
At that time, one in five companies noted that investors “focused primarily on quarterly results and were indifferent to long-term investments like sustainability.”
The challenge of greenwashing
One of the key issues troubling investors today is the reliability of ESG reporting. Although 88 percent of respondents reported increased use of ESG data over the past year, two-thirds expressed doubts about the accuracy of such information. Furthermore, 80% believe that greenwashing—misrepresenting sustainability performance—has become a more significant problem compared to five years ago.
Despite this scepticism, a paradox emerges: 93 percent of investors said they trust their portfolio companies’ climate goals. This optimistic outlook contrasts sharply with EY’s findings, which suggest that companies are struggling to achieve their sustainability targets.
Dominance of macro-economic challenges
The growing emphasis on short-term performance is largely driven by macro-economic challenges. A striking 63 percent of investors identified changes in the economic cycle, such as periods of slower growth or recession, as the primary factor influencing their investment strategies over the next two years. Trade restrictions (62 percent), rising capital costs (53 percent), and labour costs (50 percent) were also cited as key considerations.
Additionally, a majority (55 percent) acknowledged that climate change could significantly influence their short-term investment strategies. This ambivalence underscores the tension between economic and ecological priorities.