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Investors Prioritize Short-Term Gains Over Long-Term ESG Returns: Insights from the EY Survey

Introduction

In the ever-evolving landscape of investment strategies, a new survey by EY, titled the "EY Institutional Investor Survey 2024", sheds light on a concerning trend among institutional investors. The survey, conducted with 350 decision-makers from investment firms around the globe, reveals that a staggering 92% do not wish to sacrifice short-term profits for potential long-term returns associated with Environmental, Social, and Governance (ESG) investments.

Key Findings

The survey's results suggest a shift in focus away from the sustainability that ESG investments promise. Approximately two-thirds of the respondents (66%) believe that the weight of ESG factors in their investment decisions is likely to decrease in the coming years. This shift highlights a growing tendency toward prioritizing immediate financial returns over the longer-term benefits that sustainable investing could provide.

Moreover, nearly 85% of investors expressed concern that the issue of greenwashing has become more severe over the past five years. This reflects an increased skepticism regarding the authenticity of corporate sustainability claims. Additionally, one-third of those surveyed (36%) voiced dissatisfaction with the current state of non-financial disclosure by companies, despite 93% believing that corporations can successfully meet their decarbonization and sustainability goals.

The Disconnect Between Beliefs and Actions

One of the most striking findings of the survey is the evident gap between investor beliefs and their actions. Although nearly 88% acknowledged an increase in the use of ESG information over the past year, their investment decisions rarely reflect this priority. More than 92% explicitly stated they are unwilling to forgo short-term performance for the supposed long-term benefits of ESG investments. This contradiction raises questions about the true commitment of investors towards sustainable practices.

Dr. Matthew Bell, EY Global Climate Change and Sustainability Services Leader, articulated his concern over this apathy within the investment community, which should ideally be at the forefront of sustainability efforts. He points out that while many investors vocalize support for addressing climate change, their actions lag. He states, "Investors have valid reasons for their reluctance due to flaws in corporate disclosures. However, it is unacceptable to prioritize short-term satisfaction over valuable ESG investment returns that may take time to materialize."

Short-Term vs. Long-Term Perspectives

From the responses, it is clear that assessing long-term impacts of ESG policies and performance seems daunting for most investors. Only 25% claim to be equipped to evaluate these long-term impacts, while 57% feel comfortable discussing short-term effects, indicating a proclivity towards immediate financial considerations.

Half of the respondents (55%) admitted that climate change impacts their investment strategies, but a predominant 63% believe that fluctuations in economic cycles have a larger influence. Trade restrictions and tariff changes were similarly highlighted by 62% of participants as more impactful factors than climate change.

Investor Perceptions on Corporate Commitments

Interestingly, an overwhelming 93% of investors expressed confidence that companies can achieve their sustainability and decarbonization targets. However, the foundation for this optimism appears shaky, as only 17% are actively monitoring changes in corporate climate-related policies.

The lack of emphasis on ESG considerations in investment reflects a broader concern about the credibility of sustainability information provided by companies. Around 85% of survey respondents noted that greenwashing has worsened compared to five years earlier. This skepticism illustrates the need for more transparency and accountability in corporate sustainability practices.

The Call for Enhanced Disclosure

The dissatisfaction with non-financial disclosures was also notable, with 36% of investors indicating insufficient progress on corporate sustainability initiatives. An overwhelming 80% of respondents urged that vital information should be presented more clearly and in a way that allows for better comparison across corporate reports. A significant 64% believe that independent audits of corporate sustainability disclosures are necessary.

Conclusion

The survey highlights a critical moment for ESG investing, suggesting it is at a transitional phase. Although investors may not explicitly use the term 'ESG investing,' environmental impact and social capital are already being factored into corporate valuation and investment decisions.

As EY Japan's Climate Change and Sustainability Services Leader Keichi Ushijima comments, the findings emphasize the pressing need for data reliability, integration with management strategies, and the establishment of capabilities for measuring, managing, and evaluating ESG factors. Only through synchronizing policies, technologies, investment strategies, and consumer behavior can we hope to break free from the cycle of neglecting long-term sustainability for short-term gains.

The urgent call for clarity, transparency, and an engaged investment community could pave the way for a more sustainable economic future, wherein ESG investments are seen not merely as risks but as significant sources of value that can drive substantial growth and innovation.