Global commitment to the use of environmental, social and governance (ESG) standards dropped between 2022 and 2024, but the category remains robust in Europe, according to a recently released report.
“While the hard value of ESG financial activity is down from its peak in 2021, the overall growth over the past six years is strong and the market has proved surprisingly resilient in the past few years,” the paper said.
The report was published by the London-based think tank New Financial on behalf of Luxembourg for Finance, an economic development agency, in June.
Asset managers, banks, insurers and pension funds use ESG criteria to make more sustainable and responsible investment and lending decisions.
The paper found the total number of financial firms engaged with industry-standard ESG initiatives shrank by 15% globally, while the decline in Europe was just 4%.
“There are different ways to view this shift in commitment,” New Financial commented. “One view is that financial firms have outgrown these initiatives and are now advancing ESG goals on their own. Another view is that the politicisation of ESG – along with global fragmentation in the approach toward sustainability – has made firms less willing to publicly commit to sustainability.”
Out of the 500 largest asset managers globally, the number “signed up to at least one of 15 sector-relevant ESG initiatives” dropped from 419 to 402 between 2022 and 2024. “While this decrease is a concerning development,” the report said, “it is perhaps a smaller drop than one would think after all the recent noise around large US asset managers leaving these initiatives.”
“The penetration of ESG financing in capital markets has declined across most sectors since 2022,” the think tank stated. “Even European labelled ESG bond issuance has experienced a decline in terms of all bond issuance.” Only European investment funds logged any relative growth.
Despite the backlash, “sustainable finance is significantly above where it was even six years ago.”
“From 2019 to 2024, the value of assets in sustainable investment funds has doubled from $1.5 trillion (€1.3 trillion) to over $3 trillion (€2.6 million),” with Europe dominating the segment, the researchers wrote.
“In the last year, though, the sustainable funds market has begun to show signs of stagnation and even decline. In Europe, after years of steady growth, for the first time the penetration of ESG investment funds in the European fund market overall has stagnated in 2024. On a global level, this stagnation has been happening for a few years now.”
The EU and UK collectively make up “more than three-quarters of the global sustainable funds market in terms of value,” according to New Financial’s analysis. The US, the world’s largest investment fund market, represents only about one-tenth of the global sustainable funds segment.
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To spur ESG investments, the report recommended “simplifying and streamlining regulation” to provide the financial sector with more “clarity” and expanding ESG principles into covering private market funds.
At the same time, fund firms should embrace the legitimate criticisms behind the ESG backlash.
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New Financial stated: “There is a point to be made that ESG and the traditional sense of fiduciary duty do and can conflict. But that does not mean that profit and immediate returns should always be prioritised over long-term, sustainable investments. Rather, it means that asset managers and pensions could try a bit harder to explain to their clients just what benefit an investment strategy that also considers longer term, non-financial issues could bring.”
