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Impact Investing

Red tape vs. red states: Europe, North America diverge on ESG hurdles

ESG and impact investing are thriving in Europe and North America, but their challenges to progressing further are far from the same.

As ESG and impact investing attract more private capital across the globe, North American and European investors face separate challenges to sustainable investing.

In Europe, investors are more likely to see roadblocks related to regulation, while in North America, the perception that sustainable investing could result in negative returns is the most widespread barrier, according to data gathered by PitchBook in the 2023 Sustainable Investment Survey.

“There’s some in Europe who are negative on ESG, but if you look at the averages it’s much more accepted than in North America,” said Hilary Wiek, PitchBook senior strategist and co-author of the report. “It’s table stakes in Europe. In the US, they’re still fighting the battle, and the opponents are getting stronger.”

 


In the survey, North American investors ranked concerns about—or simply perceptions of—sustainable investing resulting in negative returns as their greatest challenge, with 42% of respondents ranking it among their top three roadblocks. Only 20% of European respondents agreed.

Yet using the ESG risk framework, which measures a group’s exposure to environmental, social and governance risks, does not translate to lower returns, according to a recent PitchBook analyst note. Investors who commit to ESG principles performed equally as well as their peers who do not align to ESG, the research found.

Survey respondents who thought all sustainable investing was at risk for negative returns were likely to worry about whether ESG-friendly GPs were upholding their fiduciary responsibility. Nearly one-quarter of North American respondents listed that concern as a top challenge, while only 7% in Europe indicated the same.

“There’s a debate in the US on whether you’re actually serving your fiduciary responsibility if you do ESG,” Wiek said. “The people we hear from in Europe say, ‘You’re not serving your fiduciary responsibility unless you’re using ESG.’ It’s a completely different perspective over there.”

Accelerating politicization of ESG-informed investing in the US has driven much of those perceptions. Five years after first writing about ESG factors in a letter to BlackRock stakeholders, the asset manager’s CEO, Larry Fink, said at a conference in June that he no longer uses the term ESG, as he believes it has become weaponized.

More than a dozen US states have enacted laws that restrict state investments in ESG-aligned financial institutions, according to Ropes & Gray’s legislation tracker. Such laws represent a manifestation of political concerns around ESG, Wiek said.

Meanwhile, Europeans are more worried about regulators than politicians. Unclear or overly burdensome regulations were a top challenge for 29% of respondents from Europe and only 19% of North American investors.

Investors focused on the continent have faced some of the strictest regulations on sustainable investing under the EU Sustainable Finance Disclosure Regulation, the rules of which are subject to further amendments. Meanwhile, the SEC has been mulling its own ESG disclosure rules since a mid-2022 announcement.

One point on which all respondents agreed: Lack of clarity on defining and measuring impact outcomes was one of the biggest challenges in sustainable investing across all regions, at 39% for both North America and Europe.


Featured image by Alexandre.ROSA/Shutterstock

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