From the ETF investors surveyed in the U.S., Europe, and Greater China, 74 percent of respondents planned to increase their investment in of Environmental, Social, and Governance (ESG) ETF investments over the next year. Eleven percent of investors plan to decrease their allocation to ESG ETFs, and a further 14 percent of investors had decided to remain the same in their ESG ETF allocations.

The three most common reasons for ESG investments among asset owners and managers in 2021 were brand and reputation, external stakeholder requirement, and improved long-term returns. This differs from 2019, when the most common reason improved long-term returns, which was expressed by 52 percent of respondents.

ESG ratings have emerged as the top factor influencing investment decisions globally in 2023, with varying impacts across regions. In Europe, 27 percent of institutional investors considered ESG ratings as a key driver, followed closely by Canada at 25 percent. In the United States, 17 percent of investors noted influence from this driver, while APAC shows minimal influence at just 2 percent. Sustainable Development Goals and ESG ETF Investments Climate action, represented by Goal 13 of the United Nations Sustainable Development Goals (SDG), has become the primary focus for ESG ETFs globally. As of 2024, assets worth 75.1 billion U.S. dollars were linked to this goal, with 280 out of 552 ESG ETFs targeting climate action. This emphasis on environmental concerns has aligned with the broader overall trend of investors prioritizing companies with strong ESG practices and ratings. Regional Variations in Sustainable Fund Demand While the demand for sustainable funds has remained relatively stable or has been perceived to increase across some regions, differences have been notable. In the United States, 14 percent of investors reported decreased demand for sustainable funds compared to non-sustainable options. However, Canada stands out, with over 95 percent of investors having indicated stable or increasing demand. This regional variation underscores the importance of understanding local market dynamics when developing sustainable investment strategies.

The value of assets allocated to ETF funds, which included environmental, social, and governance (ESG) goals in their strategy, increased markedly from five billion U.S. dollars in 2006 to 391 billion U.S. dollars in 2021. As of November 2023, allocated assets reached 480 billion U.S. dollars. Investment in sustainable funds, including ETFs, was primarily driven by developed markets mainly in Europe and the United States. What is environmental, social, and governance (ESG) investing? The ESG criteria is a set of principles used by investors to evaluate a company's performance when considering potential investments. The environmental aspect looked at the business's engagement in safeguarding the environment. From a social perspective, investors evaluated the business's impact on the local community and its relationships with stakeholders. Governance was reviewed by looking at internal controls, stakeholder rights, and executive pay. ESG factors have been an important component of investment decision-making. From a survey of 356 participants the majority of investors expected ESG to be a part of a firm's core strategy. The impact of ESG As ESG relevance has increased over recent years, many firms aimed to achieve higher ESG scores, yet the difference between the ESG scores of the largest 25 companies by market cap remains vast. Companies such as Visa and Mastercard had a ranking of 60 points or above. Commitment to ESG by high level executives had become a priority worldwide as approximately half of the senior management in France, Japan, Singapore, and Germany noted a commitment to ESG. ESG's importance had also grown among investors as approximately one-third of investors noted a willingness to divest from a firm if they felt the company had taken insufficient action to focus on ESG-related goals.

The environmental part of environmental, social, and governance (ESG) investment seems to be the main focus among global investors that currently focus, or plan to focus on E, S, or G priorities, according to a survey conducted in 2020. Among the respondents who currently focus on ESG investments, almost 90 percent stated that they focus on the environmental factor, while 52 percent focused on the social aspect, and 60 percent on the governance aspect. The environmental factor was also the one with the highest likely focus over the next three to five years. The Europe, Middle East and Africa (EMEA) region had the highest share of sustainably invested assets in 2020.

Why is ESG investing important?

ESG investing is an approach aimed at generating sustainable, long-term financial returns incorporating environmental, social, and governance elements into asset allocation and risk decisions. Despite its overlapping with sustainability concerns, another key driver of ESG investing is financial performance. In 2020, half of ESG investors worldwide were motivated by the possibility to increase the return or mitigate the risk of their investments.

Challenges for sustainable investments

Despite the expected positive impact of the coronavirus pandemic in raising ESG awareness among investors, there are still many challenges that sustainable investors will have to overcome in the future. Among them, impact washing was cited by the large majority of impact investors worldwide as the most relevant threat for the industry. Impact washing practices rise from the lack of clarity about how impact investments are managed, and from the inability to measure impact results. Therefore, it is often possible for companies to make untruthful impact claims, without truly pursuing any social nor environmental impact. Clearly, impact washing poses a considerable threat to a fair and efficient allocation of funds in the impact industry.

From global investors surveyed, the vast majority of respondents had a positive opinion to statements linking strong ESG practices with higher financial returns. Over 75 percent of global respondents believed it was possible to balance financial gains with a focus on sustainability, this number increased when asked to investors with a particular interest in sustainable investing.

The most common method for environmental, social, and governance (ESG) investing among institutional investors worldwide in 2021 was ESG integration, meaning systematically including ESG issues in the investment decision. The share who used ESG integration more than doubled since 2019, reaching 48 percent in 2021. Overall, ESG adoption is becoming more common, and the share who did not implement ESG methods at all decreased steadily during the period.

As of 2023, investors were primarily concerned with the ability to influence social and environmental issues. The second most popular driver with 37 percent of survey respondents stating its importance was the ability to integrate environmental, social, and governance (ESG) goals alongside financial goals.

In a survey conducted in July 2024, over half of securities holders in Japan reported not knowing about ESG investing. Around four percent had already made ESG investments. ESG investing refers to the consideration of environmental, social, and governance factors in investment decisions.

Banks led the way in having implemented environmental, social and governance (ESG) policies worldwide in 2020, followed by non-financial companies and asset managers. Among the banks surveyed, over 62 percent had a firm-wide policy on responsible or ESG investments. Family offices accounted for the lowest share of ESG policies, which was 37 percent, and the highest share of respondents who stated no intention to implement one. Many investors believe the coronavirus pandemic will increase the awareness and importance of considering ESG issues.

What is ESG policy?

ESG policy refer to Environmental, Social, and Governance policy, which is a set of standards for sustainable and conscious investing. The most common focus of the three components is the ‘E’ - environmental. Overall, ESG investing is becoming more popular., There are many reasons to consider ESG factors - for example society or clients expect it, or regulators require it. The main reason, however, why many investors chose to implement ESG policies, is because they believe it can improve investment returns and reduce risk.

What are the obstacles with implementing ESG policy?

While many investors chose to implement ESG factors into their investments as they believe it is beneficial with regards to risk and return, a large share of investors reject this notion, thinking it sometimes or always involves accepting lower returns or higher risks. Especially in the United States (compared to Canada, Europe and Asia), a relatively high share of investors expected that ESG portfolios will underperform. A further barrier to implementing ESG policy might be that a higher share of investors in 2020 had the impression there were not enough ESG offerings in some asset classes, especially in hedge funds.

The main barriers for further ESG adoption among asset owners and managers in 2019 and in 2021 relates to data inconsistency: challenges around data quality and consistency, and inconsistent quality of data across asset classes. In 2021, almost 40 percent of respondents stated these two reasons to be the main barriers, respectively.

In a survey conducted between November 2023 and January 2024, around 8.7 percent of pension funds in Japan reported making ESG investments in real estate. ESG investing in real estate was more common among general institutional investors, such as banks and insurance companies, with around 36 percent engaging in ESG investment.

North America had the lowest level of prioritization for Environmental, Social and Governance (ESG) among investors. Asia-Pacific ranked second, with 22 percent of investors prioritizing ESG. European-based investors had the highest level of ESG prioritization at 31 percent.

The share of exchanges who reported investor demand for environmental, social, and governance (ESG) disclosure in their jurisdiction have increased gradually from 70 percent in 2018 to 96 percent in 2024.

More than half of corporate issuers and investors in the Americas and Europe saw neither overperformance nor underperformance of their ESG investments compared to their non-ESG investments within the last 24 months, as of March 2021. However, in both regions, more issuers and investors saw an overall outperformance rather than an underperformance.

As of 2023, Sustainalytics was the third most popular source for Environmental, Social, and Governance (ESG) data among institutional investors based in Europe. Bloomberg ranked second, with 19 percent of survey respondents stating they used this source for ESG data. MSCI was the leading source among institutional investors surveyed, with 23 percent of investors having a preference for this source.

Environmental sustainability was the leading ESG criteria among real estate investors according to a survey conducted in March 2022. One in three respondents considered energy or waste management, green building certification, and carbon footprint as the most important criteria. When it comes to social sustainability, talent attraction and retention scored highest with 17 percent of respondents noting it as important. Meanwhile, business ethics, regulatory compliance, and sustainability oversight ranked highest within the governance criteria. Some of the most popular ESG measures already in place according to the survey results were corporate sustainability reporting and net zero planning.

Environmental, social, and governance (ESG) investment is going to continue being important in the future, according to more than half of investment providers surveyed in Hong Kong in 2021. In the Benelux region, on the other hand, about 20 percent of respondents shared this opinion. Meanwhile, the clients' expectations were a strong factor, driving the importance of ESG: in the UK, 56 percent of survey participants noted that clients expect ESG knowledge and 36 percent - that clients care about stance.

In the United States and the Asia Pacific region, there was an even split among investors. Half of those surveyed from each region noted a strong focus on Environmental, Social, and Governance (ESG), while the remaining. Canada had the lowest level of institutional investors focused on ESG at 35 percent. While almost 80 percent of European institutional investors stated a focus on ESG.

German investors were overall more cautious towards ESG investing than those from Spain or Italy, according to a survey held in 2023. Survey respondents from Germany largely disagreed more on most of the proposed statements, especially when it came to potential portfolio returns or ESG being a primary factor in choosing a financial service provider. The source does not explain why these differences exist, although it does point towards a general worldwide lack of information on what ESG does and how it could potentially reach portfolio returns.