Why UK Investors Should Treat ESG as a Long Horizon Financial Strategy — Not a Short Term Buzzword

Janet Ng, U.K. ESG Advocate

ymjanetng@gmail.com

Globally, assets managed under sustainability mandates have expanded at an unprecedented pace. ESG considerations have shifted from the periphery to the mainstream of investment decision‑making, as global sustainable investments reached US $35.3 trillion in 2020—an increase of 15% from 2018—signalling a strong worldwide momentum toward sustainable finance  (Owen, 2024). Yet for some investors who continue to treat ESG as a mere compliance requirement, recent empirical evidence from UK‑listed firms offers a crucial perspective: while ESG initiatives may initially dampen short‑term returns, they deliver substantial long‑term value, particularly through enhanced governance quality  (Naseer, et al., 2025; Moussa, et al., 2024).

From Short‑Term Setbacks to Long‑Term Resilience

From the research of Naseer et al. (2025), empirical data from 226 UK‑listed firms (2002–2023) show that ESG spending may reduce short‑term returns by about 4%, yet firms regain and exceed this loss within 3 years as markets reward reduced risk and stronger governance. System‑GMM panel reports also show that ESG scores are associated with lower stock returns, but lagged ESG effects turn positive after approximately 2 years and remain positive in the 3^rd year — signalling payoff from reduced risk, reputational benefits and operational improvements (Naseer, et al., 2025).

Moreover, regulatory developments reshape the ESG–performance relationship. According to Naseer et al. (2025), the regression results show a negative relationship between the Paris Agreement and stock returns, with coefficients of − 0.194 and − 0.092 immediately after its implementation. However, the interaction terms between ESG performance and the Paris Agreement indicate that stronger ESG performance helps offset these short‑term losses, suggesting that firms with well‑developed ESG frameworks are more resilient to the initial adverse market response triggered by the Paris Agreement  (Naseer, et al., 2025).

Governance Amplifies Value

Using data from 351 UK listed non‑financial firms (FTSE All‑Share Index, 2010–2021), Moussa et al. (2024) report a positive and statistically significant moderation coefficient (C.ESG × C.IG = 0.400, p < 0.01), indicating that strong internal governance structures in UK companies—such as independent boards, larger board size, independent audit committees, and a split CEO–chair structure—enhance the positive impact of ESG disclosures on market capitalization (Moussa, et al., 2024).

Complementary controls corroborate this outcome:

• Board size (BSIZE) = 0.119 (p < 0.01) → larger boards are positively related to market value.

• Leverage (LEV) = – 1.088 (p < 0.01) → higher debt weakens valuation.

• Capital expenditure (CAPEX) = 0.148 (p < 0.01) → investment intensity supports value creation.

The positive and significant interaction coefficient implies that moving from weak to strong governance magnifies the marginal effect of ESG disclosure on market capitalization by approximately 0.40 units. These quantitative results empirically confirm that robust internal governance frameworks reinforce the credibility and financial impact of ESG initiatives. Effective governance ensures ESG practices are aligned with stakeholder expectations and regulatory standards, translating into enhanced investor confidence and higher market valuation (Moussa, et al., 2024).

In summary, while current evidence clearly supports ESG as a long horizon value strategy, further attention is needed to refine how investors interpret and apply these insights in practice. Future research and investment guidance could focus on quantifying the expected timeline of ESG payoffs, for instance, identifying whether value creation typically materialises after three, five, or more years of sustained ESG engagement. Likewise, investors would benefit from sector specific analyses showing how ESG materiality varies across industries within the FTSE All Share. Including practical examples of UK companies that successfully link governance to ESG outcomes could also help investors benchmark credible practices against greenwashing risks.

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References:

Foley, A. et al., 2024. Restoring trust in ESG investing through the adoption of just transition ethics. [Online] Available at: https://doi.org/10.1016/j.rser.2024.114557 [Accessed 18 November 2025].

Moussa, A. S., Elmarzouky, M. & Shohaieb, D., 2024. Green Governance: How ESG Initiatives Drive Financial Performance in UK Firms?. [Online] Available at: https://doi.org/10.3390/su162410894 [Accessed 18 November 2025].

Naseer, M. M., Guo, Y. & Zhu, X., 2025. Short-term costs and long-term gains of ESG initiatives in high-risk environments: Evidence from UK firms. [Online] Available at: https://doi.org/10.1016/j.dsef.2025.100075 [Accessed 18 November 2025].

Owen, O., 2024. Integrating ESG Metrics into Financial Decision-Making: A Comparative Study of Global Financial Institutions. [Online] Available at: http://dx.doi.org/10.2139/ssrn.5240841 [Accessed 18 November 2025].

(Date: 8^th December, 2025)