Three barriers to sustainable investing

Recent trends point toward wider adoption of sustainable investing, yet some investors are still hesitant to include these strategies in their portfolios.

Questions like "How will this affect my portfolio’s performance?" and "How do you measure a company’s sustainability performance?" aren’t uncommon. Because let’s face it – when things sound too good to be true, they often are. Many investors wonder if it’s possible to generate financial returns while investing in sustainable assets.

These, among other concerns, can discourage investing and generate skepticism around companies that self-report on their environmental, social and governance (ESG) performance. In this article, you’ll learn about three of the biggest barriers to sustainable investing and how investors and organizations are working to solve them.

Barrier 1: Lack of ESG data and reporting

Public companies follow regulatory guidelines that standardize how to collect and report on an abundance of information, including financial data, risks, opportunities and operations. Regulatory agencies like the U.S. Securities and Exchange Commission (SEC) provide oversight on this information. However, evaluating a company based on its ESG performance is a relatively new practice where the same controls, in most cases, don’t exist.

Herein lies the issue: Without standardization and reporting controls in place, data can sometimes be misleading or inconsistent. Self-reporting without regulation can make investors wonder if companies are cherry-picking their ESG data. Even if companies are doing their best – and even if they aren’t leaving out important information – a lack of standardization can make it difficult for investors to interpret a company’s ESG performance.

Despite these challenges, there’s been a vast improvement over the last decade in reporting ESG data. Just look at S&P 500 companies – only 20% published ESG reports in 2011, but that number was up to 98.6% in 2023. Some of the top ESG rating companies, like MSCI and Sustainalytics, are becoming more transparent by disclosing the methodology behind their ESG scoring. Governments have also been taking notice, with the European Union passing the EU Sustainable Finance Disclosure Regulation (SFDR), aimed to help investors distinguish and compare sustainable investment strategies in the European Union.

Acquiring data and reporting on sustainability metrics is a complex barrier to tackle, but the needle of progress is moving in the right direction.

Barrier 2: Misperceptions of sustainable investing and market performance

Investors work hard for their money and want it to return the favor when they invest. Sustainable investing is still an investment, so if a strategy isn’t performing well, it could be less desirable. The good news for sustainable investors is that the long-held myth that sustainable investing requires a tradeoff in performance isn’t often true. MSCI, a global leader in ESG research and insights, analyzed global data from 2007 through 2023 in developed and emerging markets. They concluded that companies with higher MSCI ESG ratings consistently outperformed their lower-rated counterparts.

While past performance isn’t indicative of future results, MSCI believes the trend is here to stay. Their Principles of Sustainable Investing states, “The convergence of factors (climate change, social attitudes, institutional governance, technological innovation) will significantly impact the pricing of financial assets and the risk and return of investments and lead to a large-scale re-allocation of capital over the next decades. Investors who treat these factors as a fad and continue to operate in a wait-and-see mode could find themselves unprepared for the dramatic repricing of assets that could result.”

While shifting to a more sustainable model may cost businesses in the short run, there’s opportunity for companies to avoid pitfalls in the long run. Here’s an example: according to the 2024 Climate Resiliency Report, every $1 invested in natural disaster resilience and preparedness can save communities $13 in damages, cleanup costs and long-term economic impact.

Barrier 3: Cynicism about making a difference

Investors may not believe that sustainable investing can make a difference. They may view themselves as a drop in the bucket – unable to help influence change in the world through their investments. Colossal problems like racial inequity and protecting our oceans require collective societal efforts to help change the systems in place.

The thought process that investing won’t make a difference is understandable, but the logic is flawed. Small contributions can cause big changes given enough time. If investors were to prioritize sustainable investments, it could potentially influence more companies to bring their activities in line with their shareholders’ values.

During the 2024 proxy voting season, over 500 shareholder resolutions on environmental, social and governance topics were introduced, demonstrating a continuing influence in shaping corporate sustainability efforts. These efforts may be the nudge some of the world’s largest companies need, as less than half of the leading listed companies in the U.S. have a net-zero target, according to the S&P Global Sustainable1 Net-Zero Commitments Tracker dataset.

Cynicism is to be expected since there’s plenty of work ahead. However, the sentiment is shifting, particularly among younger investors, as sustainable investing becomes more mainstream and data becomes more reliable.

The bottom line: There’s still room for sustainable investing to grow

Barriers to sustainable investing still exist, and they can prevent investors from getting involved. These barriers include data and reporting, misperceptions regarding investment returns, and the perceived ability (or lack thereof) to make a difference through sustainable investing. While many organizations are charting paths to a more sustainable future, it will take a concerted effort from all stakeholders – governments, regulators, industry professionals and investors – to truly move the needle.

While progress is needed and challenges remain, the current momentum is chipping away at these barriers and displaying a promising sign of what’s to come. Ready to move past the barriers to sustainable investing? Open an account with us to get started or reach out to a J.P. Morgan advisor to discuss your options.

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