Only a third of U.S. adults are familiar with environmental, social, and governance (ESG) investment criteria while ESG funds reach all-time highs, according to a new Yahoo Finance-Harris Poll survey.
At the same time, ESG incorporation is important for those who are aware of it: 77% of respondents who were familiar with the concept consider ESG ratings when making investment decisions.
The survey, which involved 1,053 U.S. adults and was conducted between August 20 and 24, 2021, asked about attitudes toward ESG investing held by Americans of varying ages, demographics, regions, and income levels.
Millennials were the most familiar with ESG investing (51% compared to 32% of all U.S. adults), followed by Gen Z (37%).
Younger investors also sought to align their portfolios with their values: 95% of millennials and 97% of Gen Z-ers who were familiar with ESG investing said that a company's performance on ESG factors was an important factor when choosing investments.
By the end of 2019, there were $17.1 trillion in assets under management (AUM) — meaning assets professionally held, versus by retail investors — invested in sustainable assets in the U.S., according to the Global Sustainable Investment Alliance's (GSIA) annual review of sustainable investing.
(According to GSIA, the term sustainable investment "may be used interchangeably with responsible investment and socially responsible investment, among other terms, whilst recognizing there are distinctions and regional variations in its meaning and use.")
Globally, the trajectory for sustainable investments that incorporate ESG factors is on the rise. The $35.3 trillion of global sustainable AUM in 2019 is projected to grow to $53 trillion by 2025.
The systematic integration of ESG factors into risk analysis and investment decision-making is one approach investors take. Other pillars under the ESG umbrella include negative screening — where investors intentionally exclude companies or sectors from their portfolio — and shareholder activism, in which shareholders try to influence corporate behavior through direct engagement.
Top ESG investing considerations
Even within the ESG integration framework, the survey found that investors took different approaches when evaluating performance on ESG criteria.
Some ESG-driven investors (22%) said that they considered investments based on a broad spectrum of environmental, social, and governance criteria.
Another group said they made investment decisions with a particular aim or standard in mind. For instance, climate change was a top priority among ESG investors, with 28% of ESG investors selecting that factor as their primary consideration.
Climate change is creating an uncertain future that poses significant risks for businesses and financial stability as droughts, floods, hurricanes, and other extreme weather events disrupt supply chains, commodities, labor availability, tourism, and insurance costs.
And those are just some of the physical risks — companies also are contending with increased regulatory risk as lawmakers and citizens push for actions that meet the urgency and scale of the climate crisis.
At the same time, government investment into green infrastructure and growing consumer demand for sustainable practices could create profitable areas of opportunity that are set to benefit from the energy transition and climate change adaptation.
For ESG investors, recent examples of extreme weather events and climate reports influenced their financial decision-making when it came to investing and spending.
Among those who held ESG-related assets, 73% stated that they altered investing decisions compared with 63% of adults who were familiar with ESG investing. And 77% of ESG investors also said they changed spending habits based on evidence of the long-term effects of climate change as compared to 65% of all adults familiar with ESG investing.
ESG investors skeptical of greenwashing and returns
As the hype for ESG incorporation grows, so do its skeptics.
Prominent reasons why investors mistrust ESG investments are greenwashing (misleading information about companies' sustainability practices) and doubt over ESG ratings or measurements. Thirty-seven percent of those familiar with ESG investing said that greenwashing was a barrier to investing in ESG-focused assets, and 37% also claimed ESG measurement as a barrier.
In the United States, disclosures around sustainability practices and climate risks are voluntary. Because companies and the financial firms that offer ESG products can choose what to disclose and how to disclose it, there are gaps in ESG data that make it difficult for investors to compare assets.
Third-party providers like Morningstar or Sustainalytics have tried to bridge these gaps by creating their own rating systems, but ESG performance can vary greatly across these ESG scores.
This has led to criticism of ESG investing as a way for firms to command higher fees — and profits — by rebranding stocks or funds as 'sustainable' while the underlying holding minimally engages in sustainable practices, if at all.
Some, like the former chief investment officer for sustainable investing at BlackRock, have gone so far as to say that ESG investing may actually do more harm than good and stymie much-needed action on climate change. Without accountability or uniform standards, the ESG label may give cover to companies that are slow-walking climate action and other social actions.
Overall, pressure is mounting from governments and investors to develop mandatory disclosure requirements.
The European Union, which leads in sustainable fund assets, implemented the Sustainable Finance Disclosure Regulation (SFDR) in March 2021. This regulation requires financial firms to disclose how they are measuring and incorporating sustainability risks into their financial products and investments.
That same month, the U.S. SEC formed a task force focused on climate and ESG issues "to proactively identify ESG-related misconduct," including ESG disclosure gaps. U.S. Treasury Secretary Janet Yellen also threw her support behind greater ESG transparency.
But solving the issues around ESG disclosures may not remove all barriers to ESG investing — 37% of ESG investors selected investment returns as a top concern. Interestingly, this concern was shared by Gen Z and Baby Boomer investors, which could reflect the importance of financial security and retirement security, respectively.
Grace is an assistant editor for Yahoo Finance and a UX writer for Yahoo products.