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In 2023, a team of researchers at ��ɫ��Ӱ Graduate School of Business posited that investors might view progress on ESG issues as a luxury: something worth pursuing in boom times but not in lean ones.

Turns out they were right.

For three years in a row, , a professor emeritus of accounting; Amit Seru, a professor of finance; and , MBA ’03, a researcher at the ��ɫ��Ӱ GSB’s , have surveyed American retail investors’ attitudes toward environmental, social, and governance — also known as ESG — issues. (The 2024 survey was conducted by the and the at ��ɫ��Ӱ.)

The first survey, conducted in 2022, revealed a striking generation gap, with Millennial and Gen Z investors far more eager than their Gen X and Baby Boomer counterparts to see fund managers address environmental and social issues — and far more willing to sacrifice returns in the process.

However, young investors’ zeal for ESG began to wane in 2023. In the latest survey, conducted in the fall of 2024, it fell off a cliff. In 2022, for example, 44 percent of young investors thought it was “extremely important” for investment companies to use their size and voting power to influence the environmental priorities of their portfolio companies. The following year, 27 percent felt that way. This year? A mere 11 percent.

When asked if they wanted investment companies to throw their weight behind improving social and governance practices, the decline was even starker: from 47 percent to 10 percent and 46 percent to 7 percent, respectively. (All three annual surveys indicated that investors generally care less about the G in ESG.)

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“I don’t think ESG is going away. But the extent to which the investment sector will drive it is likely to continue to decline significantly.” — Amit Seru, SIEPR Senior Fellow

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The recent loss of enthusiasm for ESG investing was clear no matter how the researchers approached the question. Far fewer young investors said they were concerned about ESG issues in 2024 than in prior years, for instance. And they were much less inclined to want fund managers to advocate for better ESG practices if it meant losing money.

Only 10 percent of young investors said they’d be willing to lose more than 10 percent of their retirement savings to bring about environmental improvements like reducing carbon emissions and boosting renewable energy use — down from 33 percent in 2022. The drop was equally steep when it came to support for social issues such as eliminating the gender wage gap and providing employee benefits like parental leave and on-site daycare.

Interestingly, the loss of appetite for ESG priorities crossed party lines. As in previous years, Democrats tended to be more concerned about environmental and social issues than Republicans and independents. But like young investors, only 10 percent of Democrats now said that they were willing to lose 10 percent or more of their retirement savings to support such issues, down from 20 percent last year.

“It might be the case that those groups who previously were most in favor are starting to sour on the cost of ESG either because they do not think the hoped-for changes will materialize or that the costs of achieving societal change through business activities are going to be too high relative to the results,” Tayan says.

A collapse of confidence

That sense of uncertainty was evident elsewhere as well. In 2022, young investors were much more optimistic about future returns than older investors and much more confident about their knowledge of the markets. By 2024, however, most of that optimism and confidence had evaporated. Three years ago, 78 percent of young investors described themselves as extremely or very knowledgeable about the stock market versus 20 percent of older investors. This year, only 18 percent of young investors held themselves in such high regard.

The team also identified an intergenerational trend: Regardless of age, this year’s survey respondents were less interested in having fund managers take their views into account when voting on environmental and social issues — a clear sign that investors were prioritizing profit over other preferences.

“What they’re basically saying is, ‘We really want you to increase the value of our holdings,’” says Larcker, a director of the Corporate Governance Research Initiative and senior faculty of the Rock Center for Corporate Governance.

The researchers attribute these shifts in sentiment to changes in the economic landscape: When they began surveying investors in 2022, interest rates were low, the labor market was strong, and pandemic stimulus money was still coursing through the economy. Subsequent years saw periods of rapid inflation, rising interest rates, and a tightening labor market. “People are still feeling the pain,” says Seru, a director of the Corporate Governance Research Initiative, senior fellow at the Hoover Institution, and a senior fellow at the ��ɫ��Ӱ Institute for Economic Policy Research (SIEPR).

Those conditions made young investors more pessimistic about the economy and less willing to lose money on environmental or social goals, bringing them into closer alignment with older investors who were never keen to do so. The resulting convergence of sentiment supports the idea that investors view ESG as a luxury to be eschewed when times are tough. “When things start tightening up, it’s a different debate than when everybody’s flush,” Larcker says.

The future of ESG might therefore depend on what happens with the economy — and on how ESG itself pans out. “If ESG sentiments are highly correlated with economic confidence, we should see a rebound in support when financial conditions improve,” Tayan says. “If it turns out that the fundamental promises of ESG are flawed — that business investment and activities are not an efficient conduit to attain environmental or social change beyond the normal scope of commerce — then you would expect to see support for ESG continue to wither and die on the vine.”

Larcker suspects that retail and institutional investors alike will focus more on environmental issues because the effects of climate change are increasingly apparent and their business impacts are relatively easy to quantify.

Seru, meanwhile, argues that declining investor support, coupled with the retreat from ESG commitments by institutional giants like BlackRock and Vanguard, suggests the need for a shift toward government-led initiatives. As such, he advocates for a combination of subsidies and taxes to maintain momentum on ESG priorities that society deems important, drawing parallels to the policies that advanced California’s electric vehicle market. “I don’t think ESG is going away,” he says. “But the extent to which the investment sector will drive it is likely to continue to decline significantly.”

That may be especially true given that the surveys have revealed how mixed investors’ feelings about ESG can be and how much they can change over time. Such instability will make it harder for fund managers, corporate executives, and board members to know what their mandate is when it comes to pushing for progress on ESG issues.

Of course, investors may say one thing while doing another. The researchers are eager to work with investment firms to see whether the attitudes revealed in the surveys are reflected in retail investors’ portfolios. They’d also like to gather more data on whether specific ESG initiatives are actually paying off and why.

“If you’ve got an interesting story to tell, if you’re willing to let us come out and talk to you and see what’s going on, we’d follow up on that,” Larcker says.

This story was on January 15, 2025 by ��ɫ��Ӱ Graduate School of Business Insights.