by Jonathan Eida, researcher
Ahead of the chancellor’s budget next month, there has been much speculation about how the chancellor will meet her fiscal rules. One of the main issues for the chancellor is the persistent anaemic growth. The latest Office for National Statistics growth figures, for August 2025, show a continuing meager growth performance with only a 0.1 per cent increase . There is a concurrent issue which is that the government and its arm length bodies are standing in its own way, preventing growth from occurring.
One way that this has occurred is with the government and regulators forcing environmental, social and governance guidelines onto investors which has impacted financial returns. And investors are beginning to feel the hit in their wallets!
New data from the Association of Investment Companies’ (AIC) ESG Attitudes Tracker demonstrates waning enthusiasm for environmental, social and governance (ESG) investing among financial advisers and wealth managers. And you can see why. Years of poor performance, weakening client interest and persistent doubts about greenwashing have all contributed to the sharp downturn.
According to the AIC, only 10 per cent of intermediaries now expect ESG strategies to improve investment performance, while 51 per cent expect them to make returns worse. This has meant that ESG strategies have a net favourability score of -41 per cent, continuing a steady decline since 2021 when the net figure was +31 per cent. Meanwhile, just 11 per cent of clients now raise ESG unprompted in meetings, down from 20 per cent two years ago. Expectations of rising demand have also slumped, with only 34 per cent of intermediaries predicting growth over the next year, compared to 60 per cent last year.
As AIC research director Nick Britton observed, “Intermediaries perceive ESG strategies to have lost money and their patience is wearing thin. Ongoing concerns about greenwashing don’t help, and knowledge of the new sustainability labels is still low.”
Despite the downturn in sentiment, ESG remains deeply embedded in investment practice. Ninety-six per cent of advisers continue to recommend sustainable funds and 27 per cent say ESG is now an “embedded part” of their philosophy, even though client demand and confidence have deteriorated.
With this lack of confidence reverberating through the investors, it is of little surprise that growth is continuing to stutter when we need our economy to boom.
To address this there must be a root and branch examination of how politics has curtailed growth. A good starting point would be a look at how various regulators are pushing political agendas on investors, resulting in suboptimal outcomes.
For example, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) are both legally required to contribute to the government’s environmental goals, namely, the Climate Change Act 2008 (net zero target) and the Environment Act 2021 (nature targets). In practice, this has drawn regulators into an increasingly activist stance on ESG, effectively making them instruments of environmental policy.
However, these regulators have gone beyond these guidelines. The Financial Services Regulation Committee recently warned of “a significant degree of mission creep” among regulators, arguing that both the FCA and PRA have expanded their activities “into areas of business management that are outside their core responsibilities.” The result, it said, has been more bureaucracy, higher costs and reduced focus on regulators’ primary objectives: financial stability and consumer protection.
The Pensions Regulator (TPR) has taken a similar approach, urging trustees to treat climate change and biodiversity loss as “core risks” and to adopt “leadership” roles in achieving the government’s net zero objectives. Trustees are being encouraged to integrate sustainability into investment decisions and to adopt voluntary “transition plans” aligned with the UK Transition Plan Taskforce framework which effectively embedding ESG in pension governance.
Nausicaa Delfas, Chief Executive of TPR stated in the Climate adaptation report 2025: “Since I joined The Pensions Regulator (TPR) in March 2023, embedding environmental, social and governance (ESG) considerations, including the impacts of climate change, across our regulatory and corporate activity remains a foundational pillar of our approach. This is both across how we improve investment governance in the market and informing our own responsible corporate decision-making as a regulator.”
Investors are losing confidence in ESG strategies as underperformance and weak demand expose the flaws of regulator-driven ESG policies. By using financial regulation to pursue environmental goals, the government risks distorting capital allocation and undermining returns. Regulators have strayed from their core purpose of ensuring stable, competitive markets, instead acting as instruments of climate activism.
Ministers must reassert control and remove legal mandates embedding environmental objectives within financial oversight. The priority should be returns for stakeholders, not political activism. Growth depends on profitable investment, not regulatory activism that substitutes ideology for sound economic management.
This matters not just for individual investors, but for the wider economy. The latest IMF forecast indicates that UK growth for 2025 will be 1.3 per cent, a sign that growth remains fragile. If the government is serious about improving productivity, competitiveness and prosperity, it should focus on restoring financial returns, not directing capital through ESG mandates. Markets function best when they reward performance, not political objectives.