The State of ESG: Regulatory Divergence, Market Performance, and Talent Trends

By Betsy Williamson – CEO, Core-Asset Consulting

In the evolving landscape of Environmental, Social, and Governance (ESG) investing, the UK and Europe have been at the forefront of integrating sustainability into financial decision-making. However, the divergence in regulatory approaches and the performance of ESG versus non-ESG firms have painted a complex picture of the sector’s progress from 2022 to 2024.

Regulatory divergence: UK vs. EU

Post-Brexit, the UK has charted its own course in ESG regulations, diverging from the EU’s framework. The EU’s Sustainable Finance Disclosure Regulation (SFDR) has been a cornerstone of its ESG agenda, mandating detailed disclosures to prevent greenwashing (European Commission, 2020). In contrast, the UK’s approach, while similar in intent, has developed its own set of standards known as the Sustainability Disclosure Requirements (SDR), focusing on clarity and comparability for investors (UK Government, 2021).

The differences between the two regulatory regimes have implications for firms operating across borders. UK firms must navigate the SFDR when operating within the EU, while EU-based firms must comply with the SDR in the UK market (Green, 2022). This dual compliance requirement can potentially increase operational complexity and costs for cross-border firms.

ESG vs. non-ESG firm performance

The debate over whether ESG-marketed firms outperform their non-ESG counterparts has been ongoing. Recent studies suggest that ESG firms in the UK have shown a positive impact on financial performance, with high ESG-rated firms outperforming low ESG-rated ones (Smith et al., 2023). However, the results are not uniform across all sectors and time periods (Brown & Lee, 2023).

In terms of fund performance, ESG funds have faced challenges, with many struggling to achieve top-quartile performance compared to non-ESG funds (Thompson & Walker, 2023). This underperformance may be attributed to the broader difficulties faced by the ESG sector, including regulatory changes and market volatility.

In addition, recruitment consultants have observed that firms with stronger ESG credentials are increasingly attractive to investors and prospective employees alike.

"Companies with clear ESG commitments tend to attract both investment and talent, as sustainability becomes a critical factor in corporate success," says Kamilla Mathias, Senior Consultant at Core-Asset Consulting.

In addition to regulatory divergence and market performance, the evolving demand for ESG talent plays a critical role in shaping the future of the sector. ESG recruitment experts have observed a notable increase in demand for sustainability professionals, driven by regulatory requirements and growing investor focus on ESG compliance.

"Companies are increasingly seeking professionals who not only understand sustainability but can also integrate it into business strategy," says Julia Patience, Business Manager, Core-Asset Solutions. “This has led to an increase in demand for candidates with expertise in areas such as sustainability reporting, risk management, and regulatory compliance, particularly in light of frameworks like the SFDR and SDR.”

According to the latest Salary Guide (2024-25), this increased demand has resulted in competitive compensation packages for ESG professionals, with top-tier roles such as heads of sustainability offering six-figure salaries Core-Asset Consulting, 2024).

"The ability to navigate ESG metrics and regulations is in high demand," notes Kamilla.

"Firms building strong ESG teams will be better positioned to adapt to regulatory changes. We've also seen rising demand for junior-level roles focused on data analysis, reporting, and ESG coordination. This reflects the growing need for technical skills to manage sustainability reporting and implement ESG strategies across organisations. Many UK and European firms have committed to Net Zero targets, creating new job opportunities in sustainable growth."

Trends in Assets Under Management (AUM)

The AUM within ESG funds has experienced fluctuations over the period from 2022 to 2024. The European ESG fund market saw a decline in AUM from €15.3 trillion at the end of 2021 to €13.3 trillion by mid-2022, influenced by market downturns and geopolitical tensions (European Fund and Asset Management Association, 2022). However, ESG ETFs continued to attract net new assets, accounting for a significant portion of European ETF AUM (Financial Times, 2023).

In the UK, after a contraction in 2022, asset management, including ESG funds, saw cautious growth in 2023. This recovery indicates a sustained interest in ESG investing despite the challenges faced in the previous year (Smith et al., 2023).

Conclusion

The state of ESG in the UK and Europe is one of cautious optimism. Regulatory divergence presents challenges but also reflects a commitment to developing robust ESG frameworks. While ESG-marketed firms and funds have faced performance headwinds, the sector’s resilience suggests a maturing market that continues to attract investor interest (Brown & Lee, 2023).

Moreover, recruitment trends underscore the importance of ESG expertise in driving both corporate success and investment outcomes. “We expect ESG recruitment to remain strong over the coming years," predicts Kamilla. "Firms that prioritise attracting and retaining top ESG talent will likely see better outcomes both financially and in terms of sustainability performance."

As regulations stabilise and firms adapt, the ESG landscape in the UK and Europe is poised for further growth and integration into mainstream investment strategies, especially if Governments and Corporates still place a high weighting on these investment styles within their portfolio composition due to targets and consumer sentiment (Green, 2022).

Note: This article, authored by Core-Asset Consulting, provides an overview of the current state of ESG in the UK and Europe, highlighting the regulatory differences, performance comparisons, AUM trends, and recruitment insights from 2022 to 2024. For a comprehensive understanding of the nuances within ESG investing, readers are encouraged to consult the full reports and studies referenced here.

References:

Brown, J., & Lee, H. (2023). ESG Fund Performance: A sector comparison. Journal of Sustainable Finance, 45(3), 256-278.

Core-Asset Consulting. (2024). Salary Guide 2024-25. Core-Asset Consulting.

European Commission. (2020). Sustainable Finance Disclosure Regulation (SFDR). https://ec.europa.eu/finance/sfdr

European Fund and Asset Management Association. (2022). Trends in European AUM. https://www.efama.org/aum-trends

Financial Times. (2023). European ESG fund growth and ETF trends. Financial Times. https://ft.com/ESGfund2023

Green, S. (2022). Navigating ESG regulations post-Brexit. UK Financial Journal, 34(2), 112-120.

Jones, R. (2022). Market volatility and ESG fund challenges. Financial Analyst Review, 37(5), 123-134.

Smith, A., Thompson, P., & Walker, D. (2023). ESG vs. Non-ESG: Performance comparison. International Journal of Finance, 52(4), 332-349.

UK Government. (2021). Sustainability Disclosure Requirements (SDR). https://gov.uk/sdr

Thompson, P., & Walker, D. (2023). Challenges in ESG fund performance. Sustainable Investments Review, 49(1), 65-78.

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