A new multi-year study suggests that ESG investing is not disappearing — but it is fundamentally changing.
Research conducted by David Larcker, Brian Tayan and Amit Seru reveals a significant shift in how both retail and institutional investors evaluate environmental, social and governance (ESG) factors. What was once framed as a generational movement driven by values and activism has evolved into a more pragmatic, risk-centered approach.
The findings are based on annual nationally representative surveys of U.S. retail investors conducted since 2022, alongside parallel surveys of large asset owners and institutional managers. The conclusion: enthusiasm for ESG has not vanished — it has converged.
According to the authors, ESG preferences appear sensitive to economic conditions. When markets are strong and economic outlooks are favorable, investors are more inclined to support initiatives with long-term or diffuse benefits. In tighter environments — marked by inflation, volatility or slower growth — priorities shift toward financial resilience.
Rather than signaling a rejection of ESG principles, the data reveal a gap between stated values and revealed willingness to pay. In other words, ESG behaves less like a moral imperative and more like what economists describe as a “luxury good”: desirable when disposable returns are high, less so when constraints tighten.
The surveys of large asset owners and managers show that roughly three-quarters continue to integrate ESG considerations into investment decisions. However, their rationale differs sharply from early retail enthusiasm.
Institutional investors overwhelmingly frame ESG as a risk management tool, not a values-based mandate.
Governance factors are considered foundational — important but largely embedded in valuation.
Environmental factors, especially climate risk, are viewed as financially material over medium-term horizons.
Social factors tend to play a limited role, with data security and privacy as notable exceptions.
Crucially, ESG functions as a filter rather than a return engine. Weak ESG characteristics can disqualify an otherwise attractive investment, but strong ESG credentials rarely compensate for weak fundamentals. This disciplined, risk-first posture has remained stable — and retail investors increasingly resemble it.
The research suggests we are witnessing not the end of ESG, but the end of its most expansive phase. Grand narratives centered on stakeholder capitalism and ever-rising investor demand are giving way to a narrower, more economically grounded equilibrium. ESG persists where risks are concrete, costs are transparent and time horizons are clear — particularly in climate-related exposure.
For boards, executives and asset managers, the implication is strategic:
- ESG strategies built on presumed investor altruism may prove fragile.
- Those grounded in credible risk management and explicit trade-offs are more likely to endure.
After four years of longitudinal data, the message is less ideological and more structural. Investors are increasingly treating ESG like any other investment variable — subject to constraints, opportunity costs and shifting economic conditions. And that shift, the authors suggest, may ultimately make ESG more durable, not less.
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Source: Harvard Business Review
