How Do Investors Feel About ESG Investing?

Sustainable investing is a strategy that seeks to deliver competitive financial results while also driving positive environmental, social, or corporate governance outcomes. For some investors, sustainable investing is about aligning portfolios with values like climate action and social responsibility. For others, it’s a tool for identifying companies that are better equipped to navigate long-term risks, such as regulatory changes or environmental challenges.

While ESG investing has grown in prominence over the past decade, recent sentiment data shows a shift. Since 2023, ESG funds in the United States have experienced significant outflows as investors reassess their priorities and weigh concerns ranging from performance to political backlash and regulatory setbacks. This reversal highlights the evolving nature of sustainable investing, which continues to face challenges on multiple fronts.

(Learn more about the history of ESG investing)

As a result, advisors need to better understand investors and the role ESG plays in their lives. Hyper-personalization motivates advisors to learn more about their clients’ financial goals. Advisors can start by understanding their clients’ unique interest in ESG themes such as climate change, social issues, and diversity, equity, and inclusion.

Investor interest in ESG affects all players along the value chain, driving demand for ESG data, research, analytics, thought leadership, and technology.

What factors do investors consider when deciding whether to incorporate environmental, social, and governance factors into their financial decisions?

• Measure awareness. Do people engage with values-based investing? How well do they understand ESG investing? What sources and tools do they trust?
• Gauge attitudes and behaviors. What motivates investors to make investment decisions based on their values? What drives their choices?

We wanted to hear people speak about ESG and dig deeper into their perceptions. With qualitative research, we can identify themes, like specific behaviors, values, and investment practices.

We recruited 20 investors to take part in one-on-one video interviews for about 45 minutes. The group ranged in age from 18 to 75 years old, with a mix of genders, work statuses, and levels of investing experience.

• Investing Experience: The group is evenly split between beginners (25%) and experts (25%), with the majority (50%) identifying as having moderate experience. This suggests a diverse range of familiarity with investing, making it a balanced sample for analysis.
• Investable Assets: Participants‘ financial profiles vary widely, with 25% holding $500,000 or more in investable assets, while 10% fall into the $5,000-$24,999 range. The remaining participants are distributed across mid-range asset brackets, highlighting a mix of wealth levels.
• Gender: The group achieves a perfect gender balance, with 50% identifying as male and 50% as female, ensuring equal representation in the analysis.
• Age Groups: The largest age segment is 35-44 years old (40%), followed by 55-75 (25%), 45-54 (20%), and 18-34 (15%). This distribution skews slightly toward middle-aged and older participants, reflecting a key demographic for financial decision-making.
• Employment Status: A significant majority (65%) are employed full-time, while 15% are part-time workers, 15% are retired, and 5% are stay-at-home parents or students not seeking work. This indicates that most participants are actively engaged in the workforce.

In our study, investors often started investing young: in high school, college, or shortly after graduation.

Most investors had a passive, “set and forget” mindset. They make automatic investment contributions at regular intervals. They don’t often actively trade or rebalance their portfolios.

Employers, family, and friends introduced most of our respondents to investing. Some invested their first dollars through a 401(k), others through parents or other family members.

During the COVID-19 pandemic, some participants became more active investors. Some are still dabbling or looking for short-term opportunities. One hypothesis is easy-to-use app and fractional shares made investing more accessible during that time. Work-from-home employees could explore a new way to invest.

Most investors consider themselves to be inexperienced. Their history ranged from having a 401(k) account and a few experimental stocks to more complex investing strategies.

Those with more experience:

• Conducted their own research and analysis on a greater range of investments.
• Might work with a financial advisor.
• May look at annual reports and prospectuses.

Regardless of their experience level, investors said they check their investments almost daily. They also traded many times a year and buy and sell regularly.

News reports inform the opinion of most investors we surveyed. They didn’t consider in-depth research, investment strategies, or financial criteria as often. Several mentioned family and friends as sources for investment ideas, but still do their own research.

Online search dominated their investment research—almost always starting with Google.

Most chose investments based on a high awareness of the company. Their online research focused on company reputation rather than financial fundamentals. This means that investors relied on what they could find in search—company websites and mass media articles—over financial or business publications.

Investors consider trust when researching online, but they often don’t know the source. With search engines like Google, investors often couldn’t discern the trustworthiness of a source.

Those who followed the business or financial news recognized Morningstar, the Wall Street Journal, and Bloomberg. Lesser-known companies included Barron‘s, Kiplinger‘s, MSCI, Fortune, Forbes, Entrepreneur, and Argus research.

Only a few investors reviewed prospectuses or annual reports. Most didn’t track stocks on broker websites or other investment apps like Yahoo! and Barcharts.com.

Some investors use social media for financial information but ignore investment advice. Facebook, Instagram, Public.com, Reddit, TikTok, and YouTube came up in our research. This suggests that mass media remains the authoritative source for investment information despite the prevalence of social media.

In our study, investors said they engage in humanitarian, social, and environmental causes. Respondents cared about social issues like:

• Homelessness
• Hunger
• Human trafficking
• Youth
• Domestic violence
• Veterans
• Elderly rights

Others spoke about their involvement with environmental causes:

• Climate change
• Packaging
• Organic food
• Sourcing and manufacturing
• Waste

Our participants’ causes drive their buying decisions and brand engagement. They remain loyal to or avoid certain brands because of their values. But these investors didn’t do much research to learn if a company aligns with those values.

Participants only noticed a company’s values through social media, news outlets, and ads. But this perception of shared values doesn’t carry over to investing. People can separate perception from reality when making investment decisions, we concluded.

Investors don’t conduct extensive research on the accuracy of a brand’s reputation. This is why perception and marketing matter for a brand’s reputation. People respond to what they see and how they feel rather than fact-based research.

When asked about popular, trusted brands like Starbucks and Amazon, people wanted clear information on their ESG stance. We found that price isn’t a barrier. Some investors said they would pay a premium for products if they believed companies shared similar values.

Family health considerations trumped environmental impact when investors decided to pay a premium for products. Many said they would pay double for healthier food choices and 10-20% more for big-ticket items like cars.

While participants feel strongly about social and environmental issues, value-based investing isn’t top of mind for most of our respondents. Many said focus on financial performance and growth. A few perform their own due diligence to make decisions, but not many.

Some respondents said they would exclude stocks that don’t align with their values. Some would not buy a stock if they read a negative news article; others would divest if they read a report that challenged a company’s integrity.

Still, people want to invest in companies that share their values. When given a choice between two solid-performing investments, they chose the investment that aligned with their worldview.

Some participants would sacrifice returns to align with their values but expressed hesitation. They said they still focused on the bottom line and would overlook values for a product they liked.

Sustainable investing (or “ESG investing”) can seem complex, especially for retail investors. Many don’t recognize the term ESG. Even when we defined ESG, participants struggled to understand what it meant for their own investment decisions.

Investors rated themselves on sustainability, as being “somewhat” or “more familiar” with the term. Still, it meant different things to different people. The term “ESG investing” has become an umbrella term for sustainability strategies.

Our research shows that investor values impact their financial behavior. But lack of knowledge influences the financial decisions they do and don’t make.

In general, investors rely on mass media and reputation for their investment information. These sources often fall short. They don't provide business intelligence about a company from a personal or financial standpoint.

ESG investing demands more accessible, clear information. Many respondents gave complex responses when asked about ESG investing. Instead of choosing either-or, they sought to balance investment performance and alignment with their values.

Investors look at sustainability as one lens in their decision-making process. A holistic approach would serve them better. To make informed choices, investors need to understand impact, performance, and the trade-offs between risk and values.

Investors welcome support with investing—ESG investing in particular. Advisors and financial professionals can build trust when they take the time to educate their clients. They can help them clarify their motivations and get to the heart of what really matters to them.

ESG investing isn’t one-size-fits-all. When investors get the information they need in an accessible way, they tend to respond with energy and purpose.

• Apply Exclusions: Investors who apply exclusions remove issuers from their portfolios based on certain products or services, an industry, or corporate behaviors, like major controversies.
• Limit ESG Risk: Investors who limit ESG risk use ratings to understand a company’s exposure to certain material ESG issues.
• Seek ESG Opportunities: Investors who use ESG information to seek opportunities apply data to identify companies that are sustainability leaders.
• Practical Active Ownership: Investors who practice active ownership engage with companies to influence sustainability-related policy.
• Target Themes: Investors who target sustainability themes identify investments that stand to benefit from the secular trends toward greater sustainability in the way we live and work.
• Assess Impact: Investors who use security selection to make an impact on sustainability goals integrate impact assessments into portfolio construction.

ESG investing introduces questions beyond traditional investment advice. This confusion represents an opportunity.

You can unearth a person’s underlying motivations for investing and make this a part of client onboarding. With existing clients, major life events (such as marriage, planning a family, retirement, and estate planning) can open larger conversations about why they invest. You can explore if ESG might play a role in their investment decisions.

Consumers have their own motivations for ESG investing. Some want to limit financial risk. Some want to improve their returns. Others want to make an impact or seek policy change.

It’s not enough to know if a client is interested in sustainability. Advisors must be able to drill down into what their clients want to achieve. Then introduce and discuss different approaches based on their motivations and goals.

The six ESG investing approaches act as a springboard to identify client preferences. From there, advisors can help clients set values-based goals knowing the trade-offs and risks.

Morningstar provides resources to help advisors match clients with the right portfolios for their risk appetite. Two ways we do that are the market’s most validated risk tolerance questionnaire and the Portfolio Risk Score. The questionnaire digs into the context of a client’s comfort level with risk while the Portfolio Risk Score matches risk profiles with the most appropriate investment recommendations.

There’s no “one-size-fits-all” approach to investing, ESG or otherwise. Advisors who adopt a consultative approach and understand client motivations, preferences, and goals around sustainability can prove their value in a competitive industry.