The problem with ESG is not performance. It is expectations

Financial advisers and wealth managers are becoming increasingly sceptical about ESG investing. Not because the principles have suddenly changed, but because the performance has.

Is this the wrong argument?  Organic food doesn’t taste better, so why do we think ESG has to have better performance?

According to the latest ESG Attitudes Tracker from the Association of Investment Companies, sentiment towards ESG strategies has sunk firmly into negative territory. Just one in ten advisers believe ESG investing will improve returns. More than half expect it to worsen performance. That leaves ESG with a net favourability score of minus 41 per cent among intermediaries.

This marks a sharp reversal from 2021, when a net 31 per cent expected ESG to enhance performance. The direction of travel since then has been fairly consistent, and not in the way ESG proponents might have hoped.

Nick Britton, research director at the AIC, says advisers’ patience is wearing thin.

“Intermediaries perceive ESG strategies to have lost money,” he says. “Ongoing concerns about greenwashing don’t help, and knowledge of the new sustainability labels is still low.”

He adds a point few advisers will find controversial.

“If intermediaries see a trade-off between ESG investing and returns, then returns are going to come first, unless clients have specific ESG requirements.”

What is notable is that advisers are not acting alone here. Clients are increasingly driving the slowdown in ESG demand.

Only 11 per cent of clients now proactively raise ESG in meetings, down from 13 per cent last year and 20 per cent in 2022. ESG, it seems, has quietly slipped down the agenda.

One respondent summed it up neatly.

“I cannot remember the last time somebody walked in and said they wanted an ESG investment strategy. That does not happen.”

Another adviser described what felt like a turning point.

“My most wholeheartedly ESG-focused client of ten years asked to remove screening. If there was ever a bellwether for where demand is heading, it is him.”

Looking ahead, intermediaries expect this trend to continue. Just 34 per cent expect ESG demand to rise over the next 12 months, down from 60 per cent last year. Meanwhile, the proportion expecting demand to fall has more than doubled to 24 per cent.

Alongside softer demand sits deep scepticism about ESG claims themselves. Only 1 per cent of intermediaries say they completely trust sustainability claims made by funds. That is technically an improvement on last year’s 0 per cent, but not one likely to inspire confidence.

And yet, ESG is far from disappearing from adviser businesses.

Ninety-six per cent of intermediaries still recommend sustainable funds, up from 89 per cent last year. On average, 16 per cent of client assets sit in sustainable strategies, broadly unchanged from previous years.

More than half of advisers say ESG investing is offered depending on client objectives, while 27 per cent say it is embedded into their investment philosophy and process.

As one respondent put it, “ESG is not an add-on. It is just part of the normal process for selecting funds.”

So advisers are not abandoning ESG. They are simply applying a sharper filter to what it claims to deliver.

For advisers, the challenge now is less about selling ESG and more about handling it properly.

• Separate values from performance. Be clear whether a client wants ESG for ethical alignment, return expectations, or both. Confusion here usually leads to disappointment later.

• Interrogate the labels. Do not rely on fund branding alone. Understand what screening, tilts, or exclusions are actually being applied.

• Reset expectations. ESG is not guaranteed to outperform, underperform, or save the planet on schedule. Frame it as a preference, not a promise.

• Let clients lead. If ESG is important to them, build it in thoughtfully. If it is not, avoid forcing the conversation.

• Document the rationale. Given the scepticism around claims, clarity in suitability reports matters more than ever.

ESG may no longer be the investment industry’s favourite acronym. But neither is it going away. Advisers who treat it as a tool rather than a belief system are likely to navigate the next phase far more comfortably.

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