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Sustainable Investing: Challenges and Opportunities

Sustainable investing has seen remarkable growth over the last few years, with an increasing number of consumers embracing greener financial decisions. According to the 2021 Global Sustainability Study, 85% of consumers across surveyed countries have shifted towards more sustainable options within five years. Similarly, the 2022 EU Barometer on Retail Financial Services and Products found that 60% of Europeans prioritise ensuring their savings and investments do not fund environmentally harmful activities, making them more inclined to choose financial products labelled as sustainable.

Sustainable Investing Challenges
Source: EC (2022), "Retail Financial Services and Products”, Flash Eurobarometer 509.

Despite this encouraging shift, sustainable investing is not without its challenges. From inconsistent ESG criteria to concerns over greenwashing, significant barriers remain, stalling widespread adoption. Addressing these issues is key to unlocking the full potential of sustainable finance.

1. ESG Criteria: The Complexity of an ESG framework.

A core challenge in sustainable investing lies in the lack of globally accepted ESG definitions. While the overarching goal of sustainable finance is to integrate environmental, social, and governance considerations into investment strategies to achieve long-term societal and environmental benefits, the criteria for measuring ESG performance differ significantly across regions and institutions. This disparity creates a fragmented landscape, complicating investor decision-making.

For example, the UK has introduced the Sustainability Disclosure Requirements (SDR), which focus on curbing greenwashing through standardised ESG reporting and stricter labelling for sustainable financial products. Meanwhile, the EU’s Sustainable Finance Disclosure Regulation (SFDR) mandates transparency around how ESG risks are factored into investment strategies and their impacts on returns. These regional initiatives highlight progress but also underscore the broader issue: there is no universal ESG framework.

Adding to the challenge, variations in assessment methodologies further hinder standardisation. ESG evaluations can span diverse factors such as carbon footprint, water usage, governance practices, and workforce diversity. A recent study by PwC revealed that 90% of ESG funds fail to include clear, measurable indicators—such as quantitative thresholds—in their disclosures. Reliance on third-party ESG data providers also contributes to inconsistencies due to the use of divergent metrics. While the vast majority of funds rely heavily on third-party ESG data providers, only 30% disclose the data sources used.

The lack of a unified framework leaves investors navigating a maze of conflicting information, limiting their confidence and ability to align portfolios with their values.

2. ESG Criteria: The Risk of Misleading Claims

Greenwashing—the act of exaggerating or fabricating the sustainability credentials or misleading claims about financial products—poses a significant challenge to ESG investing. A comprehensive analysis of 230 European retail funds revealed that almost all the “impact” claims were misaligned with applicable EU regulatory guidance. Many of these funds conflated the environmental activities of individual investee companies with the overall impact of the fund’s investment strategy, resulting in vague and unsupported assertions.

Sustainable Investing Challenges
Source: 2nd Investing Initiative (2020), “A Large Majority of Retail Clients Want to Invest Sustainably”.

This issue extends beyond environmental claims. PwC research highlights that approximately 80% of sustainability disclosures in prospectuses fail to include clear, specific asset allocation metrics, instead relying on generic language. These practices not only distort critical information but also erode trust in ESG markets, making it harder for investors to distinguish genuinely impactful products from misleading ones.

3. ESG Criteria: The Problem with Jargon

The language surrounding sustainable investing further complicates an already fragmented market. Many financial products rely on vague or qualitative descriptions instead of concrete ESG metrics. Terms like “investing in companies that lead in sustainability,” “material sustainability risks,” or “SDG contributions” are often used without precision and clarity.

Moreover, key phrases like “ESG integration”, “impact investing”, and “best-in-class” are frequently used interchangeably or defined inconsistently across financial institutions. Also ambiguous product labels such as “fossil-free” or “socially responsible” are often deployed without accompanying transparency or clear methodologies to validate these claims. For example, a “fossil-free” fund might exclude oil and gas companies but still invest in other high-emission sectors, like aviation or cement production. This lack of precision not only impedes investor understanding but also undermines their ability to gauge the actual impact of their investments on environmental, social, or governance goals.

4. Investor Behaviour: Literacy in Sustainable Investing

A major hurdle for ESG investing is the widespread lack of financial literacy, which limits many retail investors’ ability to engage with sustainable financial products effectively. On average, just 25% of adults across OECD countries are aware of the existence of sustainable financial products, and a mere 2.7% actually hold financial products labelled as “sustainable,” “green,” or similarly designated.

Sustainable Investing Challenges
Source: FMA (2022), "Consumer Experience with the Financial Sector Survey 2022".

Additionally, the European Insurance and Occupational Pensions Authority (EIOPA) reports that up to 75% of retail investors in Europe are unaware of the United Nations Sustainable Development Goals (SDGs). This lack of awareness hinders their understanding of how ESG investments contribute to global sustainability efforts and limits their confidence in choosing these options.

This unfamiliarity with core financial concepts creates a double barrier for sustainable investing. It not only prevents individuals from understanding the potential benefits of ESG products but also undermines their confidence in engaging with these options.

5. Investor Behaviour: Mistrust and Disengagement

While many investors express a genuine desire to align their portfolios with ethical and sustainable goals, a combination of unclear ESG criteria, inconsistent metrics, scepticism, and misinformation severely undermines trust and engagement.

Greenwashing continues to be a significant obstacle, eroding consumer confidence in ESG investments. In the UK, 44% of consumers report distrust in financial institutions’ ESG-related claims, citing vague or unverifiable assertions as a key concern. This mistrust is mirrored across Europe, where a study by the EIOPA found that 63% of consumers expressed scepticism towards sustainability-related statements made by insurance providers. Additionally, 77% of respondents admitted they lacked the tools or knowledge to verify the sustainability credentials of financial products.

The prevalence of greenwashing not only damages the credibility of ESG products but also discourages investors who might otherwise be motivated to pursue sustainable options.

6. Investor Behaviour: The Intention-Action Gap

An intention-action gap reflects the disconnect between investors’ intentions, such as a desire to invest sustainably, and their actual behaviour—failing to take the steps needed to align their investments with their values. For example, a survey by the Financial Markets Authority (FMA), New Zealand’s financial regulator, found that while 68% of investors prefer ethically and responsibly managed funds, only 26% actively choose fund managers based on ESG credentials.

Sustainable Investing Challenges
Source: EIOPA 2022, Flash Consumers’ Eurobarometer 2022, “Consumer Trends Report 2022".

The combination of unclear criteria, inconsistent disclosures, and widespread scepticism serves as a significant barrier to action, preventing the full potential of the ESG market from being realised.

7. Investor Behaviour: Trade Returns for Impact

Despite the challenges of mistrust and the intention-action gap, sustainable investing remains a top priority for many investors. A substantial portion of investors is willing to trade a portion of their financial returns in exchange for making a positive impact. According to a study by the Cambridge Institute for Sustainability Leadership (CISL), investors are often comfortable sacrificing 3% to 5% of returns to align their investments with personal values or support global ESG objectives. Many investors will take action and make a trade-off between values and financial returns if they perceive fewer barriers to sustainable investment.

Sustainability Remains a High Priority

To fully unlock the potential of sustainable finance, financial institutions must prioritise greater transparency and innovation. While 68% of European investors cite maximising returns as their primary goal, 60% also prioritise aligning investments with personal values, and 46% emphasise contributing to broader societal impact. These statistics highlight significant opportunities to cater to investors seeking to balance financial objectives with sustainability aspirations.

To meet this demand, institutions must adopt clear, standardised methodologies for measuring ESG impact, minimise ambiguity in disclosures, and expand the range of sustainable investment options. Such measures will effectively bridge the gap between investor intent and action, fostering a more transparent, inclusive, and dynamic market for sustainable investments.

References

2nd Investing Initiative (2020, March). “A Large Majority of Retail Clients Want to Invest Sustainably. Survey of French and German retail investors’ sustainability objectives”. https://sustainablefinanceobservatory.org/resource/retail-clients-sustainable-investment

European Commission: DG Financial Stability Financial Services and Capital Markets Union, Ipsos European Public Affairs (2022), “Retail Financial Services and Products”. https://www.europeansources.info/record/retail-financial-services-and-products

European Insurance and Occupational Pensions Authority (EIOPA) 2022, “Consumer Trends Report 2022″. https://op.europa.eu/webpub/eiopa/consumer-trends-report-2022/en

Financial Conduct Authority (FCA) (2020), “Financial Lives 2020 survey: the impact of coronavirus”. https://www.fca.org.uk/financial-lives/financial-lives-2020-survey

Financial Markets Authority (FMA) (2022), “Consumer Experience with the Financial Sector Survey 2022”. https://www.fma.govt.nz/assets/Reports/FMA-Consumer-Experience-with-the-Financial-Sector-Survey-2022.pdf

Organisation for Economic Co-operation and Development (OECD) (2023), “Financial consumers and sustainable finance: Policy implications and approaches”, OECD Business and Finance Policy Papers, No. 32, OECD Publishing, Paris, https://doi.org/10.1787/318d0494-en.

Organisation for Economic Co-operation and Development (OECD) (2023), “OECD/INFE 2023 International Survey of Adult Financial Literacy”, OECD Business and Finance Policy Papers, No. 39, OECD Publishing, Paris, https://doi.org/10.1787/56003a32-en.

Simon Kucher & Partners (2021), “Global Sustainability Study 2021. Consumers are key players for a sustainable future”. https://www.simon-kucher.com/sites/default/files/studies/Simon-Kucher_Global_Sustainability_Study_2021.pdf

University of Cambridge Institute for Sustainability Leadership (2019). Walking the talk: Understanding consumer demand for sustainable investing. Cambridge, UK. https://www.cisl.cam.ac.uk/resources/sustainable-finance-publications/walking-the-talk-understanding-consumer-demand-for-sustainable-investing

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