Study Finds Financial Returns Still Matter Most to ESG Investors
While investors may care about ethics and climate risk, their expectations about financial performance still play a major role in whether they actually invest in ESG funds.Investors Generally Expect ESG to Underperform
Nearly Half See No Particular Reason to Invest in ESG
How the Research Was Conducted
Values Matter, and So Does Value
Click here to subscribe to the ESM weekly e-newsletter.
The most important finding from a large study of US retail investors published last year finds that even investors who say they care about ESG issues are much more likely to invest when they also believe they can earn competitive returns.
Among investors primarily motivated by ethical considerations, only 4% of those who expected ESG investments to underperform the market by more than 0.5% in fact owned ESG funds. That increased to 11% among those who expected ESG investments to outperform by more than 0.5%. This suggests that values alone rarely drive investment decisions. Financial expectations remain highly important, even among investors who express strong ethical or environmental concerns.
The study, “Four Facts About ESG Beliefs and Investor Portfolios,” was published in the Journal of Financial Economics in February 2025. It was conducted by Stefano Giglio of the Yale School of Management, Matteo Maggiori of Stanford Graduate School of Business, Johannes Stroebel of NYU Stern School of Business, Zhenhao Tan of Yale, Stephen Utkus of Georgetown University and the University of Pennsylvania, and Xiao Xu of Vanguard.
Investors Generally Expect ESG to Underperform
Another significant finding is that investors generally did not expect ESG investments to outperform conventional equities. On average, respondents expected diversified ESG equity portfolios to return about 2.1 percentage points less per year than the overall stock market over the following 10 years. The perceived performance gap grew during the study period, from roughly 1 percentage point in June 2021 to 2.5 percentage points by December 2023. That does not mean ESG investments actually underperform. The study measures what investors believe about future returns and how those beliefs influence their decisions, not what actually occurred.
Nearly Half See No Particular Reason to Invest in ESG
The survey also found considerable skepticism toward ESG investing. About 48% of respondents said they saw no particular reason to invest in ESG. Among those who did see a reason, 24% cited ethical considerations, 22% viewed ESG as a possible hedge against climate risk, and just 6% said higher expected returns were their primary motivation. During the 30-month survey period, the percentage of investors saying there was no good reason to invest in ESG increased by five percentage points.
Investor attitudes were also reflected in actual portfolios. Only about 3.4% of respondents owned ESG-focused mutual funds or ETFs. Investors motivated primarily by ethical considerations had the largest ESG allocations. Roughly half of those who owned ESG investments identified ethics as their main motivation, while 81% of ESG investors reported high concern about climate risk. The results suggest that concern about environmental and social issues can influence investment decisions, although those concerns operate alongside financial expectations rather than independently of them.
How the Research Was Conducted
The researchers used the GMSU-Vanguard survey, an ongoing survey of randomly selected US-based Vanguard retail and retirement investors and anonymously linked their responses to their actual investment holdings. ESG-related questions were included in16 survey waves between June 2021 and December 2023, with approximately 2,000 responses in each wave. About 80% of participants held retail investment accounts and 20% retirement accounts. Because many respondents participated repeatedly, researchers could also examine how attitudes changed over time.
The survey asked investors about expected ESG returns relative to the overall stock market, their primary reasons for considering ESG investments, and their concern about climate change. Researchers then compared those answers with actual ESG fund ownership. The authors note that Vanguard investors tend to be older and wealthier than the overall population of retail investors, so the results should not necessarily be generalized to every investor.
Values Matter, and So Does Value
For companies and advocates of sustainable business practices, the study finds that investors can care deeply about ethics, climate and other stakeholder considerations while still expecting those investments to make economic sense. The implication is that the strongest case for responsible business practices may not be that investors should sacrifice returns for social objectives. It is that companies should demonstrate how better treatment of employees, customers, communities and the environment can contribute to sustainable value creation and competitive financial performance.
Enterprise Engagement Alliance Services
Celebrating our 17th year, the Enterprise Engagement Alliance helps organizations enhance performance through:1. Information and marketing opportunities on stakeholder management and total rewards:
- ESM Weekly on stakeholder management since 2009. Click here to subscribe; click here for media kit.
- RRN Weekly on total rewards since 1996. Click here to subscribe; click here for media kit.
- EEA YouTube channel on enterprise engagement, human capital, and total rewards since 2020
Management Academy to enhance future equity value for your organization.3. Books on implementation: Enterprise Engagement for CEOs and Enterprise Engagement: The Roadmap.
4. Advisory services and research: Strategic guidance, learning and certification on stakeholder management, measurement, metrics, and corporate sustainability reporting.
5. Permission-based targeted business development to identify and build relationships with the people most likely to buy.
Contact: Bruce Bolger at TheICEE.org; 914-591-7600, ext. 230.
