Investor appetite for ESG investment is rising. A Morgan Stanley survey of 2,250 investors across North America, Europe and Asia Pacific found that 92% are interested in sustainable investing, up from 88% in 2025.
In the UK, the most recent FCA Financial Lives data shows that the proportion of investors who want their money to do some good as well as provide a financial return stood at 72% in 2024. This was down from 80% in 2022, but the number of investors actually putting money into responsible investments grew to 18%, up from 14% in 2022 and 9% in 2020.
And arguably, following a summer of intense heatwaves, the growing reality of the consequences of climate change are likely to lead to an increase in the number of UK investors searching for ESG alternatives.
But growing market participation isn’t translating into flows. Investment Association (IA) data shows that market share of sustainable and responsible investment grew rapidly between 2020 and 2023, from 2.8% to 7.2%, but growth slowed to 6.5% in 2025. Assets held in responsible funds continue to rise, growing by 1.9% last year, but the wider industry grew much faster at 8.8%.
Why the gap exists
“Not knowing enough about responsible investing” (21%) was a key reason for not choosing to invest responsibly, alongside “lack of money” (22%), according to the FCA survey. Definitions are part of the problem, with ESG meaning different things to different people.
At a high-level, investors are looking for investments that are environmentally sustainable, socially responsible and well governed, but there are conflicting views on how that should be delivered.
Some investors will completely screen out companies deriving revenue from fossil fuels, while others argue that investing in the best and greenest of these firms will support the transition to renewable energy and future sustainability.
The regulator has attempted to address this issue, aiming to enhance transparency and protect investors from misleading claims.
It introduced anti-greenwashing rules in May 2024, which apply to all FCA-authorised firms, and naming, marketing and labelling rules specifically for UK funds in December 2024 under the Sustainability Disclosure Requirements regime.
However, equivalent guidance or labelling requirements for MPS providers and DFMs have not yet been issued, and there is currently no date for it to be published.
The performance question
Performance may also have contributed to the slowdown in fund flows in recent years. The MSCI ACWI SRI index returned around 56% over the five years to July 2026, against roughly 65% for the broad MSCI ACWI according to LSEG data. This gap is largely down to ESG funds missing out on rises in energy and defence stocks, which have performed strongly due to the conflicts in Iran and Ukraine, as well as wider geopolitical tensions and trade disruptions.
At the same time, political support for ESG has declined, especially in the US where the Trump administration has moved to unwind a number of federal ESG-related policies since 2025. This includes reversing environmental commitments, ending federal diversity and inclusion programmes and withdrawing from the Paris Agreement global climate initiative.
However, the investment picture is starting to look more favourable. Data from Morgan Stanley shows EU labelled sustainable funds outperformed conventional equity funds by 1.77% in Q2 2026, boosted by their tech holdings. Responsible funds are often overweight in technology as these companies tend to have low carbon-intensity and the transparent reporting that ESG scoring relies on.
The opportunity
Policy is also changing in response to geopolitical instability and disruption to energy supplies, which is likely to benefit sustainable funds. Governments now see ESG risks as economic risks, visible in inflation pressures and supply-chain fragility.
The conflict in the Middle East has made energy security a higher priority for policy makers at a time when demand for electricity is rising, with AI driving growth in power-intensive data centres.
This is creating new opportunities, with the International Energy Agency estimating that global investment in clean energy, which includes renewables and nuclear power, will reach $2.2trn in 2026, almost double that of fossil fuels.
Despite the growing opportunities, cost can be a sticking point with ESG investments sometimes perceived as expensive. It is difficult to deliver genuine exclusion criteria through low-cost passive funds, as these mostly track a specific market index.
Custom MPS offers a more nuanced approach, providing greater flexibility than an off-the-shelf portfolio to tailor investments more closely to the client’s values, sustainability preferences, cost tolerance and investment goals.
With energy security, AI-driven power demand, and clean energy investment reshaping the flow of capital, it could be time to give ESG investing another look.
Read more: ESG frameworks do not ‘red flag’ defence-related uses
