Is ESG Dead?

The once-surging tide of Environmental, Social, and Governance (ESG) investing appears to be receding. Across all age groups, with the younger generation being a key demographic, there is far less interest in adherence to investment preference or principle when it comes to making portfolio decisions than there was a few years ago. So, how did we reach this low point in ESG investing? 

During the COVID-19 pandemic, there was growing interest in ESG investing. This culminated in 2021, which seems to be the year that ESG sentiment was at an all-time high for both financial professionals and everyday investors. That time of heightened social consciousness motivated investors to “put their money where their mouth is,” and led to a significant number of mentions of ESG directives during corporate earnings calls.¹  Initially, it was perceived as a win-win: aligning investments with ethical values while potentially enhancing long-term returns.

This sentiment reinforced itself in 2022 as 44% of young investors polled by Stanford researchers believed that it was essential for investment companies to pressure public companies to adopt an ESG mindset. Their conviction was such that they were inclined to advocate for ESG practices even if it meant losing money. This sentiment has reversed dramatically. This same study, conducted in 2024, shows that only 11% believed in the importance of an ESG mindset for investment companies and were even less inclined to advocate for it, even if it meant they would lose money.²

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Several factors have led to this dramatic drop off in interest: 

Business: Stanford researchers concluded that ESG might be perceived as a luxury good during economic downturns. When faced with financial uncertainty, investors may prioritize immediate returns over long-term, potentially less tangible, societal benefits.⁴

Markets: Investors flooded into ESG investing based on the view that companies incorporating social and environmental directives will gain goodwill and, over time, sustain higher profits and stock valuations. However, studies have shown that capital flows to companies that evaluate ESG initiatives solely on the merit of whether such projects are the best use of the company’s resources to contribute to their bottom line. ⁵

Politics: Several states have enacted legislation restricting the consideration of ESG factors in investment decisions, creating uncertainty and potentially discouraging companies that “integrate ESG investment into their policies, procedures, and disclosures”.³

Our view is that when the pandemic checks were spent, inflation started to rise, and labor demand fell off, the outlook was no longer as optimistic among younger investors. When money is scarce, the principles of ESG are viewed as an unnecessary drag on portfolio profits. There is less desire to take action for the greater good of the globe and instead focus on maximizing their personal near-term investment returns. As a result, without a change to economic conditions or a re-evaluation and re-engineering of the procedures and defining principles of ESG, the approach may be out of favor for a while.

Regardless, if this story teaches us anything, it is that everything is cyclical, and trends will eventually change. As client needs evolve, the only thing we can expect to remain consistent is that clients will continually ask their advisors to adapt.

Whether clients want to focus on maximizing performance or simply want to exclude certain companies rather than subscribe to the entire ESG framework, Pave Pro is the optimal tool to help wealth managers continually adapt and manage around client needs. Our technology empowers advisors to build risk-managed portfolios that aim to minimize downside volatility and outperform with minimal tracking error, all while retaining the ability for bespoke, value-based tailoring for clients who want it.

The beauty of Pave Pro is that it’s not built for one type of client. It can be optimized for every single client an advisor has, regardless of circumstance or belief. But don’t just take our word for it. 

We’re offering a free trial so you can experience Pave Pro firsthand. To learn more. please reach out by emailing sales@pavefinance.com or pressing the button below. We look forward to speaking with you.

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1. Butters, John. “Lowest Number of S&P 500 Companies Citing ‘ESG’ on Earnings Calls Since Q2 2020,” FactSet (September 18, 2023).  
2. Gelfand, Alexander. “Young Investors’ Support for ESG Dropped Dramatically in 2024.” Stanford Institute for Economic Policy Research (SIEPR), 16 Jan. 2025, siepr.stanford.edu/news/young-investors-support-esg-dropped-dramatically-2024. 
3. Houston, Carolyn, et al. “ESG Battlegrounds: How the States Are Shaping the Regulatory Landscape in the U.S.” The Harvard Law School Forum on Corporate Governance, 11 Mar. 2023, corpgov.law.harvard.edu/2023/03/11/esg-battlegrounds-how-the-states-are-shaping-the-regulatory-landscape-in-the-u-s/. 
4. F. Larcker, David. Seru, Amit. Tayan, Brian.“Is ESG a Luxury Good?”, Stanford Closer Look Series ().
5. F. Larcker, David. M. Watts, Edward. Tayan, Brian. Pomorski, Lukasz. “ESG Ratings: A Compass Without Direction,” Stanford Closer Look Series (August 2022).) 
6. Testimonial provided on May 15th, 2024, by an Independent Investment Adviser with $500+ million in AUM. They are an incoming client of Pave Finance, Inc. No compensation was provided in exchange for this testimonial.

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