To some industry onlookers, times have never been better for investments that account for environmental, social, and governance (ESG) factors, or ESG-integrated investing.
As of 2018, financial professionals managing nearly 25% worth of all US-based assets ($11.6 trillion AUM) are invested using ESG integration, according to the Forum for Sustainable and Responsible Investment (US SIF). This is a 44% rise from the amount of ESG-integrated assets that were invested in 2016. This increase illustrates the impressive growth in demand for ESG-integrated investing.
Yet only 36% of advisors offered ESG-integrated investment options in 2018, InvestmentNews reports. The disconnect is causing consternation among investors eager to incorporate ESG integration in their portfolios. At the same time, investment advisors who believe in the value of ESG see this as an opportunity.
ESG Interest Is Multifaceted
Interest for ESG-integrated investments can be traced by generation and gender. In terms of generation, significant interest comes from younger investors, as reflected in the 2018 Schroders Global Investor Study. Over the past five years, 71% of investors ages 18-24 and 75% of those ages 25-34 increased their allocation to sustainable investments. Additionally, among high–net-worth individuals, FactSet found that 70% of Millennials expect money managers to conduct ESG analysis.
As for gender, over 80% of women see value in ESG analysis, compared to the 54% of men who hold the same view, according to a study by the CFA Institute.
Despite such findings, many traditional investment advisors still sidestep ESG discussions, according to Doug Lynam, investment advisor and partner at LongView Asset Management. “I have friends who are advisors who don’t do any ESG investing, and they tell me it’s a relief that they’re not competing with me,” Lynam says. “They tell me I’m going down a dead end by only offering ESG options. They’re just not interested, and they don’t see the value proposition and the potential benefits in terms of risk management.”
Common ground, however, may be found on the governance front. For example, the Harvard Law School Forum on Corporate Governance and Financial Regulation said that the largest index of fund managers in the US “view governance not as a compliance exercise, but as a key component of value creation and risk mitigation.”
Some advisors are hamstrung by markets that do not offer enough ESG-tied investment options to meet demand. Others struggle with understanding client expectations around ESG philosophies and effectively addressing unique client interests and desires.
Advisor Perspectives Vary
Cerulli Asociates explains that investors’ opinions on ESG-integrated investing vary because not all investors agree that this strategy provides competitive returns, mitigates risk, and offers lower fees. In addition, more senior investors may have an aversion to adopting new methodologies, which hinders the industry’s shift toward ESG-integrated investing.
“The whole industry tends to be more conservative in its ability to change and adopt new ways of thinking,” says Lynam, who also founded the ESG Fiduciary Institute to enhance the long-term perspective on fiduciary responsibilities. “However, fiduciary duty requires advisors to consider the best interests of their clients, which means we must protect the future we are investing for.”
To be fair, not all advisors who do not provide ESG solutions are dodging the issue. According to the CFA Institute, some are hamstrung by markets that do not offer enough ESG-tied investment options to meet demand. Others struggle with understanding client expectations around ESG philosophies and effectively addressing unique client interests and desires.
Data issues around quality, consistency, and standardization may also reduce confidence in ESG measures for some money managers and advisors, according to Bloomberg.
Education Could Be Beneficial
The reality is that demand for ESG-integrated investing continues to grow among institutional and retail investors alike. As such, many investment advisors understand that they must develop or expand related service offerings.
Perhaps the biggest key to such efforts, according to Cerulli Associates, is advisor education around the benefits ESG analysis provides, as well as information to address anxieties around underperformance, which have been countered by multiple studies.
Many advisors also find that ESG discussions apply to all generations and genders, as a 2019 study from Allianz Life revealed that ESG interest among Baby Boomers and Gen X investors is growing, too.
Ultimately, Lynam sees that market realities will drive the industry’s environment moving forward.
“I think when advisors start losing clients and realize that their business model is at risk, they’ll become very interested in ESG,” he says. “That’s not moralizing about the underlying issues but speaking to the practicality of it: they will lose business if they’re not serving the needs of their clients, who will eventually go somewhere else.”