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Are ESG credentials really people’s priority when investing their money?

Callum Gray

Consumer influence on corporate ESG strategies

The salience of Environment, Social and Governance (ESG) considerations to businesses and individuals is continuously evolving. As consumers become more literate about these issues, the influence they can exert over corporations is becoming increasingly powerful. One area in which consumers can exercise influence is in their investing decisions, but to what extent do consumers really prioritise ethics when considering how to invest their money? What does this mean for businesses’ long-term strategies?

November’s COP 27 conference will refocus the spotlight of international discourse on sustainability, and on the role businesses must play in tackling climate change. There is a risk, however, that the discourse surrounding events such as COP present progress on ESG measures as inherently at odds with growing economic prosperity. This is particularly dangerous given the deepening cost of living crisis that is impacting so many of the world’s developed economies.

It is important in times like these that businesses understand the British public’s attitudes towards such challenges, and that they use these insights to shape their strategy accordingly.

Returns is still the no.1 investment priority

At a time when oil and gas companies rake in record profits whilst other businesses in the economy struggle, it may appear that unencumbered economic growth is the reserve of those willing to disregard ESG measures. Investing in shares in such companies, so-called ‘sin stock’, i.e. stocks in companies not complying with recognised standards, or ones that operate in ‘unsavoury’ industries, is decried by some, but is this reflective of the attitudes of the British public?

Our research into consumer attitudes towards pension investing finds that people’s number one priority when investing is returns, not investing in line with their values.

On behalf of the Centre for Progressive Policy (CPP), we found that when it comes to pensions (traditionally individuals’ largest and most important investment pot), investing in a fund that is in line with people’s ‘social, moral, or ethical values’ ranks fifth out of the six priorities tested. Financial returns, by contrast, are people’s biggest priority when deciding where their pension is invested, followed by the level of risk they take, and the fees they are charged.

Moreover, there is no evidence that younger investors feel more strongly about investing ethically than their older counterparts. Many may have expected large differences between age groups and the extent to which each would be prepared to sacrifice returns in order to invest in line with their values. Younger people are often perceived to have more of an appetite for such investing because of more widespread, vocal support for causes relating to sustainability and ethics, as well as the fact that younger people are further from pension age and thus more abstracted from the reality of needing to cash in on large returns. This assumption, however, is not accurate. Returns and risk are the top priorities for people of all ages.

Even more striking is the finding that, of those who would prioritise investing in line with their values, less than a fifth would do so if it meant their return on investment decreased.

The ethical or moral implications of investing only factor into most individual’s thinking as long as their returns are not negatively affected.

A divided demographic

That said, the concept of ethical investment should not be dismissed as unattractive or irrelevant to investors. Indeed, through advanced analytics modelling we find that, all other things being equal, people do favour investment in funds that actively do good over funds that do not. If people’s returns are not impacted, there is greater demand for funds that invest in line with people’s values. A lack of appetite for ethical investing is therefore not necessarily borne out of apathy, but rather that greater importance is placed on returns and risk.

Investing ethically and achieving high returns are not mutually exclusive, in fact ESG investment funds do still have a focus on returns. When presented with a choice between returns and values, however, the prospect of losing money in the name of societal progress is a luxury many cannot justify.

Yonder Clockface uncovers that this is particularly true of those who have lower than average ‘security’ (health and wealth) and live in an area of below average ‘diversity’. The analysis also shows that those who disproportionately prioritise ethical investing over their own returns are likely to enjoy higher levels of security, and live in areas of higher diversity, often university-educated city dwellers. This is not an endorsement from these people for lower return ethical investing, but it shows that where there is limited support, it is more likely to be found amongst those who can afford to be concerned with wider societal issues. This belies a deeper truth that the public is not happy to make personal sacrifices to pay for societal change.

As the cost of living crisis deepens, the need for investments to provide high returns will likely only increase.

What does this mean for businesses in the long term?

While this insight reveals that investing ethically may not be the priority for the majority of the public, it does show that all other things being equal, there is a desire for progress on ESG measures.

This is supported by wider research conducted by Yonder that suggests that continued progress on ESG issues is considered vital for business growth, particularly by senior stakeholder audiences. These audiences, and some sections of the public, view ESG progress as a hygiene factor, wherein a lack of progress or genuine commitment deeply impacts a business’s reputation.

As the public is generally not prepared to make financial sacrifices to drive positive societal change, they now see it as the responsibility of government and big businesses to foot the bill and lead the way. Public expectations are only going to increase and the question ‘is ethical investing possible?’ will become more commonplace. Businesses can no longer afford to treat ESG as an afterthought, or worse, a drain.

Compliance cannot, in the long term, come at the expense of profit. The public prioritise returns and expect sustainability.

For businesses to simultaneously stay profitable and maintain a positive reputation with the public, sustainability and ethical business practices must be central, holistic, and form part of their long-term strategy.

As businesses face mounting pressure to deliver on ESG, they must also be cognisant of the public’s demand for return on investments. Making progress on ESG issues whilst delivering returns is not just a possibility, it is a necessity. The businesses that understand this, and find solutions that deal with both demands mutually, will be those best placed to navigate through the uncertain waters ahead.

Ultimately, the public expects action on ESG without compromise, and businesses must be prepared for this reality.