Navigating the evolution of ESG investing

Will the UK take a lead on ESG investing amid a US rollback?

The UK is poised to take a strong leadership role in ESG investing, along with other European counterparts, as the US potentially backtracks under a Donald Trump administration.

Culturally and politically the UK is ahead of the US on the ESG journey, and with Europe home to 84 per cent of sustainability funds, and the US just 11 per cent, according to Morningstar figures, the UK looks like it is in the right region to drive change. 

Governance standards in the UK are strong, and regulators like the FCA play a key role in shaping the market, says Adrian Murphy, chief executive at Murphy Wealth.

He notes that the real driver of ESG adoption is market forces, not government policy.

Murphy adds: “As global markets shift towards ESG, businesses – including those in the US – will align with investor and consumer expectations. Companies integrating ESG effectively aren’t simply doing it out of virtue. They recognise it as essential for long-term financial resilience.

“The UK is well placed to lead, but ESG investing is inherently global. The challenge is moving beyond ESG as an ethical stance and embedding it into investment strategies as a core financial principle. The direction of travel is clear – now it’s about who moves fastest.”

UK ESG history

Katrina Brown, head of responsible investment at Evelyn Partners, points to historical events to highlight how far back the UK started on its ESG activities.

This includes the UK being the first major economy to halve its total greenhouse gas (GHG) emissions between 1990 and 2022 while growing its economy by almost 80 per cent, according to data released by the Department for Energy and Net Zero in February 2024.  

This data follows on from data released in late 2023, which showed that the UK had cut its carbon emissions from fossil fuels in half compared to the peak in 1970, making the UK the first G20 country to achieve this feat, with carbon dioxide emissions from fossil fuels now below 320 million metric tons, a level not achieved since the 1800s.

 Separately, a new world record was set at the UK-based JET laboratory using nuclear fusion to produce energy, where the results are triple what was achieved in similar tests back in 1997. 

A newly formed body, UK Industrial Fusion Solutions, is tasked with making this project a commercial reality by 2040.

Brown says: “When you consider that tucked away in the Midlands a newly created programme will aim to deliver fusion energy via the Spherical Tokamak for Energy Production (STEP), you can already see the enormous potential the UK has. 

“This project could provide us with limitless clean energy, using the same process that powers stars. 

“According to the International Energy Agency, nuclear fusion could generate four times more energy per kilogram of fuel than fission – the process currently used in nuclear power plants – and nearly 4mn times more energy than burning oil or coal. Now the mission of STEP and UK Industrial Fusion Solutions is to make this a commercial reality.

“While there is still a long way to go to achieve a truly clean economy, these developments highlight the enormous strides the UK has already made and how it is already positioning itself to be a global leader in the energy transition but also in climate change related risk management and the sustainable investment space.”

Brown, however, says that further developments will be dependent on the UK government’s continued policy work and investment as part of its overall green finance strategy.  

UK offering

So what challenges or opportunities does the UK present for ESG investing?

Murphy says the UK presents a strong opportunity for ESG investing, but only for those who approach it with “rigour and clarity”. 

This is because regulatory oversight is tightening; with the FCA’s sustainability disclosure requirements set to reshape the landscape. 

He adds: “This will weed out greenwashing, as funds can no longer claim sustainability credentials without robust evidence. Some have already dropped ESG labels to avoid the risk of mis-selling. 

“While this creates short-term uncertainty, it’s a positive shift – it ensures credibility, which will drive long-term demand.”

The UK also has a highly developed financial sector, with London remaining a global hub for investment innovation, Murphy notes. 

With banks seriously considering factoring ESG policies into credit assessments, companies without clear sustainability strategies could face higher financing costs. 

This financial pressure will push businesses to integrate ESG into their operations, creating stronger investment opportunities, Murphy adds. “They’re not looking at this out of the goodness of their hearts. It’s because companies that are taking ESG seriously at policy level are better long-term prospects.” 

However, challenges remain. The biggest issue is the lack of standardisation, particularly in governance metrics. 

Murphy says: “Environmental impact can be measured relatively well – carbon footprints or emissions levels – but what defines good governance? A global standard would bring much-needed consistency but we don’t have it yet. 

“There’s also political uncertainty, with a softening of some net-zero commitments in the UK, and complete backtracking on many policies under Trump in the US. Again, the broader direction of global travel is clear: companies that embed ESG effectively will gain a competitive advantage, making it a profitable long-term play.”

Echoing Murphy’s comments, Guilherme Pampolin, an investment research analyst at Square Mile Investment Research, says the challenges for the UK are predominantly related to three key areas:

1. The threat of negative influence from the anti-ESG rhetoric coming from other global powers.
2. The management of the UK’s national accounts and budget, which might impose a limitation to growth in this space should the  government not invest in long-term projects.
3. The quality, availability and standardisation of ESG data. 

On the plus side, Pampolin says the UK offers a variety of opportunities for responsible investing and is actively working towards becoming an even more attractive prospect for those looking to align their financial goals with investor values. 

Regulation

He says: “The regulatory oversight, increased number of green bond issuances and the ongoing development of sustainable funds distributed in the UK all contribute to this.  

“Indeed, while some nations are increasingly adopting a negative narrative around ESG as a topic, this presents the UK and other well-prepared, well-intentioned nations with the opportunity to fill the sizeable gap.”

On the regulatory side, while the FCA’s SDR is expected to help tackle the problem of greenwashing, there are concerns that it risks adding complexity for advisers and asset managers.

"There’s already a lack of consumer understanding around ESG investing – many people don’t fully grasp what it means – and now fund managers will need to navigate stricter definitions and compliance burdens," Murphy says.

"[However], the market is evolving. The FCA’s new rules will force funds to be more transparent about their sustainability claims, which is a good thing." 

In the course of his work Murphy says he has seen too many products labelled as ‘green’ or ‘sustainable’ without the data to back it up.

He says regulation will help ensure that ESG investments actually deliver on their promises, rather than just acting as a marketing tool: “From an adviser’s perspective, ESG investing needs to be measurable, systematic, and diversified – not just a concentrated bet on a few green stocks. Clients want to know their investments are making an impact, but they also care about risk and returns. Striking that balance is key.

“Ultimately, the market will mature to a point where greenwashing becomes irrelevant because ESG will be embedded into mainstream investing. It will no longer be sustainable investing, it’ll just be ‘investing’. Until then, compliance will be a challenge, but one that’s necessary to build trust in the sector.

Challenges to meet standards

Pampolin says the SDR regime has the potential to strengthen the reputation of the UK as a leader in the responsible investing space.  

However, despite having published the SDR policy statement more than a year ago, many fund groups are still struggling to meet the standards expected by the regulator to achieve an SDR label. 

He adds: “The amount of work placed on the shoulders of asset managers has increased substantially, but the hope is that this work will ultimately elevate the industry in terms of facilitating better consumer choice and helping them meet their financial and sustainability objectives. 

The economy

“Advisers have already grappled with the consumer duty and should be compliant with their authorised status. The SDR in itself shouldn’t make their lives more difficult,” Pampolin notes.

As the world of ESG investing matures, it also faces challenges from the toughening macroeconomic climate.

According to Pampolin, the cost of living has redirected some priorities, but sustainable investing is still a durable narrative, especially with younger investors.

As he explains, many investors likely invested in the peak of the ESG trend in 2019 without being fully aware of the nuances that these types of investments contain.  

For example, many believed good returns and a ‘feel-good’ factor about contributing positively to social and environmental progress were inextricably linked over all time periods. 

“However, sustainable investments often require a longer-term time horizon that many investors were not prepared for. This has led to shorter-term investors losing faith in a less favourable macroeconomic environment now compared to 2019,” Pampolin adds.

As an industry, we are beginning to better educate investors about the inherent biases of responsible investing, which tend to benefit from an environment with lower interest rates, high economic growth, political support, and strong pan-industry initiatives – all of which are favourable for the so-called growth stocks to outperform.

“It’s crucial to bear in mind that a high number of stocks in the responsible investing space are growth stocks and, therefore, will need the aforementioned factors to be in their favour.

“With that in mind, as market conditions change, our investment portfolios also need to be ready to adapt, but without losing sight of the huge long-term trend that is ahead of us, and all the opportunities that it presents.”

Understanding the nuances

Murphy agrees that while rising inflation and cost of living pressures naturally shift focus toward short-term returns, that does not mean ESG is losing ground.

He says: “The bigger danger is that some investors and advisers view ESG investing as overly complex or restrictive due to evolving regulations. 

“That could lead to hesitation from both sides: investors fearing greenwashing and advisers questioning whether it’s worth the compliance burden.

“The key is taking people on a journey. ESG investing can be done in a way that aligns with both values and returns, but it requires authenticity. The demand will come, and those who engage early – thoughtfully and transparently – will be well positioned when it does.”

When it comes to whether ESG portfolios are outperforming traditional investments in the UK market, or recent market downturns exposing vulnerabilities, Murphy says it depends on how 'sustainable' is defined and whether a like-for-like comparison is being made. 

He says: “A well-diversified global ESG portfolio – focused on measurable carbon reduction, exclusions from high-risk or controversial industries and practices, and strong governance – should, in theory, be more resilient and profitable in the long run. But short-term performance is influenced by broader market cycles and sector weightings.

“The UK has a strong base of ESG-aligned funds, but most portfolios are globally diversified. While UK investors and regulators can set high expectations, the reality is that companies worldwide need to adapt to shifting policies and investor pressure.”

Evelyn’s Brown says instead of considering whether an investment has ESG qualities, investors should be asking, 'What are the material ESG factors for this activity or company and how do they affect an investment case?'. This is a subtle but important difference.

She adds: “An ESG factor can be qualitative or quantitative information related to ESG topics. ESG integration, as an investment strategy, operates on the belief that not all such factors are reflected in asset valuations, prompting the exploration of various information sources to gain further insights into them. 

“Additionally, ESG factors often overlap and do not fit neatly into separate categories. For instance, a regional conflict could be considered both a geopolitical and a social factor.”

Murphy also points out that ESG investing doesn’t necessarily mean sacrificing returns. It’s not a choice between doing good and making money: “It’s about both, especially over the long term. Right now, the market isn’t being driven by retail investor demand. 

“While the FCA’s focus on ESG as part of ongoing suitability assessments is shaping the conversation, most consumers are still hedging their bets. Very few have strong preferences for specific ESG themes or exclusions, but it does serve as a useful starting point to discuss values and priorities.”

“ESG isn’t a monolithic strategy. Like any investment approach, it must be constructed carefully. Long-term fundamentals matter more than short-term fluctuations, and companies prioritising sustainability now are likely to emerge as stronger investments in the future.”

Ima Jackson-Obot is deputy features editor at FT Adviser