ESG's once esteemed status as a profitable venture is waning.
Investors Remain Cautiously Optimistic About Sustainable Investing
The pandemic and the slowdown of the global economy continue to be the biggest concerns for investors, according to Keith Wade, chief economist at Schroders. However, the current global trend among institutional investors towards sustainable investing reflects a nuanced stance of cautious optimism.
Sustainable fund flows rebounded strongly in Q2 2025, with global sustainable fund assets growing nearly 10% to $3.5 trillion. European investors, in particular, increased ESG investment, and sustainable strategies performed on par or better than broader market indices during this period. This supports the view that sustainable investing remains strategically important, even amid geopolitical and economic disruptions linked to the pandemic aftermath.
While many companies have sustainability strategies, only a minority (about 21% of CFOs) truly integrate ESG into their core business strategy as of mid-2025. This indicates institutional investors see sustainability as a relevant but still emerging factor, requiring maturation for strategic advantage.
Concerns about greenwashing—misleading claims about sustainability—and uneven regulatory landscapes prompt investor caution. For example, European markets faced uncertainty around anti-greenwashing measures, but the approaching implementation of stricter guidelines (e.g., fund naming rules) has begun to ease some doubts. Additionally, institutional investors emphasize the need for better emissions reporting and greater engagement with companies to drive real-world climate impact rather than merely adjusting portfolios superficially.
Increased geopolitical complexity, AI adoption uncertainties, and trade issues have elevated corporate governance importance within the ESG framework. Institutional investors recognize governance’s rising priority, alongside environmental and social factors, but are realistic about the fragmented regulatory environment, requiring innovative business models beyond traditional nonprofit solutions.
Andrew Howard, Global Head of Sustainable Investment at Schroders, commented that investors' concerns about sustainable investing reducing returns are decreasing. However, greenwashing remains the biggest problem in sustainable investing, cited by 59% as the most significant barrier.
46% of global investors doubt whether risks associated with sustainable investing can be measured and managed. In Europe, 62% of investors now attribute greater importance to sustainable investing due to the pandemic. The proportion of global investors expecting annual returns of over 9% has increased from 5% in 2020 to 13% in 2021. The expectation is that extremely low interest rates will be maintained.
Investors are increasingly concerned about a reduction in liquidity due to a tightening of monetary policy. 82% of investors expect a return of at least 4% per year over the next five years, up from 72% last year. Only 8% of investors worldwide do not believe in the benefits of sustainable investing, down from 23% in 2018. According to Howard, there's a need for ever-improving reporting and information provision to address investors' concerns or challenges in relation to sustainable investing.
Inflation fears are a growing concern for investors. 38% of the surveyed institutions expressed concerns about the performance of sustainable investments, a decrease compared to 45% last year and 48% in 2019. The COVID-19 crisis has brought sustainable investing more into focus for institutional investors, with 52% considering it a more important focus due to the pandemic.
Other increasingly important factors are regulation and climate change, reflecting the agenda of the new US administration under President Biden, as well as measures taken by China and the EU. Lack of transparency is also increasingly seen as a difficulty, with 53% of investors citing it.
The Schroders Institutional Investor Study 2021 surveyed 750 institutional investors worldwide with a total managed asset of around USD 26.8 trillion. With increasing inflation fears, many are also worried about a possible tightening of monetary policy and see an increase in borrowing costs as a significant risk. Covid-19 is still seen as the greatest factor influencing portfolio performance, although there has been a significant decrease compared to last year. With these challenges in mind, institutional investors continue to navigate the complex landscape of sustainable investing, seeking opportunities for growth while managing risks.
Investors increasingly recognize sustainable investing as strategically important, integrating it into their core business strategy in a minority of cases. However, concerns about greenwashing and a need for better emissions reporting and company engagement persist, prompting a cautious approach.
Institutional investors anticipate sustainable investing can potentially deliver annual returns, with 13% expecting rates over 9%, but fiscal policy tightening and reduced liquidity pose concerns about maintaining these returns.
