ESG credentials key to attracting private investments, with ethical and moral concerns a deciding factor

31 March 2022 – New research by leading London law firm Collyer Bristow LLP has demonstrated that the ESG (environmental, social and (corporate) governance) credentials of a company are an important factor in investment decisions for a number of private investors – with over a third of respondents (35%) confirming that moral and ethical reasons drive investment decision-making. The firm commissioned a survey by YouGov of UK adults with investable assets of at least £100,000, to understand current attitudes to ESG disclosure and the role this plays in investment decision-making.

Investment decisions based on ESG credentials are driven by investors’ moral and ethical views rather than financial reasons

When asked why ESG credentials can make an investment a more attractive proposition , over a third of respondents (35%) confirmed that moral and ethical reasons would drive their decision. This was the most common response cited. Financial or other reasons were less related, with only 13% of investors citing the future profitability of the investment and 12% citing the positive impact on their reputation, for why ESG credentials can make an investment opportunity more attractive. This suggests investors want to invest in companies that align with their moral and ethical values, rather than seeing investing in companies with ESG credentials as a way to secure greater returns on their investment.

Companies seeking investment could benefit by making greater disclosure on ESG matters

Correspondingly, investors were more likely to invest in a company that made greater disclosure efforts about its impact on climate change and sustainability efforts than a company that did not, with 51% of investors confirming this. Again, younger investors demonstrated a greater appetite for information about a company’s ESG credentials and its impact, with 61% of respondents aged 18-34 years old agreeing that they would be more likely to invest in a company that had made greater disclosures than a company that did not. Conversely, only 49% of respondents aged 35 years old and over agreed that greater ESG disclosure would make them more likely to invest.

This finding suggests that there is significant appetite within the investment community for more information to be available about a company’s activities, and that companies seeking investment may benefit by providing greater information than just that required by regulatory compliance. However, respondents were less certain whether greater reporting requirements and transparency rules are needed in order to enable them to make more informed investment decisions with confidence. Only 47% of those surveyed said that increased reporting requirements would benefit them in this way

Investors are concerned about more than just a company’s environmental impact – social and governance issues matter too

Perhaps surprisingly amid the national focus on climate change following the COP26 summit in Glasgow in November 2021, a company’s impact on the environment was not the overriding concern for investors when assessing its ESG, although it was important.

When asked what factors were most important to them when assessing the ESG credentials of a company as a potential investment opportunity, the most important factor was human rights/modern slavery concerns, cited by 64% of respondents. This was followed closely by the company’s levels of carbon dioxide/greenhouse gas emissions (58%) and its governance structures and transparency (58%). This finding demonstrates that investors are concerned about a range of issues within the ESG umbrella, not only about the environmental impact.

This finding was consistent across age groups, with both those aged under and over 35 most likely to cite human rights/modern slavery concerns as the most important consideration. This was cited by 68% of respondents aged 34 and under, and 62% of respondents aged 35 and over. For younger respondents, the company’s social impact (e.g. lack of diversity or commitments to address this) was their second most important concern (cited by 64% aged 18-34) and the company’s governance structures and transparency the third most important consideration (cited by 62%). By contrast, those aged 35 and over rated the company’s governance structures and transparency as the next-most important consideration (cited by 58%), and the company’s levels of carbon dioxide/greenhouse gas emissions, or other environmental impact, were rated joint-third most important for this group, both cited by 52%. For those aged over 35, social impact was listed as an important consideration by only 42%, showing a clear difference in priorities between age groups.

Overall, nearly half of investors say that the ESG credentials of a company are an important factor in making an investment decision

The research confirmed that ESG considerations are an important factor in decision making for a number of investors, with 47% of respondents stating that the ESG credentials of a company are an important factor when considering whether to invest in a company. This contrasts with 16% who believed it was either somewhat or very unimportant. Within this finding however, there were notable generational differences. While 62% of respondents aged between 18 – 34 said a company’s ESG credentials were an important factor in their investment decisions, only 43% of those aged over 35 said the same. Female investors were also more likely to say that ESG credentials were an important factor than male respondents, with 56% of female respondents confirming ESG credentials are an important factor, compared to only 39% of male respondents.

Ragavan Arunachalam, Partner in the Corporate and Commercial team at Collyer Bristow, commented:

“These findings make interesting reading for companies and private equity investors alike. ESG and impact investing has been one of the fastest growing areas of investment for several years. Companies seeking investment should be careful to consider the impact of their ESG credentials on potential investors, as thorough ESG disclosures and a good level of transparency can help to de-risk positions for investors and make a company a more appealing investment prospect.”

Janine Alexander, Partner in the Commercial Disputes team at Collyer Bristow, added:

“Where there is growing interest and demand from investors for ESG to play a greater role in investment decisions, as this research demonstrates, we know that this is also an area that regulators are starting to pay increasing attention to and where there is potential for disputes and issues to arise, particularly around greenwashing.

The potential for disputes to arise will depend on the investors’ expectations and whether there is a disparity between how the company is selling itself to investors and what it is actually doing. Given the current level of appetite for ESG and impact investing, we see this as an area ripe for disputes and issues over the next few years in the UK.”