Environmental, social and governance (ESG) is not without its critics. There are naysayers aplenty in this space. Those are the breaks with relatively new investment concepts, particularly one that rouses emotions as ESG does.
Still, scores of data points confirm ESG principles and strategies are being embraced at the highest levels of the investment community. As a result, ESG garners more mainstream attention and as a result of that, more retail investors, including existing and potential clients, get interested.
Expect that trend to continue because more clients, particularly those in younger demographics, are prioritizing values-based investing. Still, there are critics.
There's no shortage of commentary, data, studies, surveys and the like pertaining to environmental, social and governance (ESG) investing.
That makes sense because purveyors of some of these studies are fund issuers or research firms hired by such companies. In other words, they have a vested interest in pushing ESG. Pessimistic as that view may be, the reality is cash continues pouring into ESG strategies, including exchange traded funds. However, ESG remains fertile territory for advisors when it comes to nurturing client relationships and another new survey proves why that’s the case.
A recent survey of 1,228 investors by the FINRA Investor Education Foundation and NORC of the University of Chicago indicates retail investors have significant ESG interest. More good news for advisors: They have substantial ESG education needs.
“More than half (57 percent) of respondents strongly or somewhat agree that investing can be a way to make positive change in the world, and over three-quarters (77 percent) of respondents indicate that, if they had the opportunity to invest in a ‘socially responsible’ mutual fund, they would assume that companies held by that fund would align at least somewhat with their personal values. Only about a third (37 percent) agree or strongly agree that a company’s role should be to maximize earnings and not pursue social or environmental goals,” according to the survey.
FINRA also finds that despite all the hoopla surrounding ESG, clients need a lot of help understanding these strategies. That’s a potential boon for advisors when it comes to establishing and rejuvenating client relatonships.
“Although media coverage of ESG investing has substantially increased in recent years, only 28 percent of investors report being at all familiar with ESG investing,” notes FINRA. “Only 24 percent of study participants can correctly define ESG investing, and only 21 percent know what the letters in ESG stand for; a quarter of the sample incorrectly believe ESG stands for ‘Earnings, Stock, Growth.’”
Other Points to Consider
Another reason advisors are vital in the ESG equation is that many of the funds in this category aren’t that old.
Many advisors (and some clients) look for three-, five-, even 10-year track records on funds, regardless of underlying strategy. Just eight of the funds highlighted by Morningstar are three years old or older, but it pays to remember that with ETFs, age is nothing but a number.
Additionally, there crucial demographic trends advisors need to be aware, particularly if they’re looking to grow their practices among particular age groups or ethnicities.
“Investors under age 30 (17 percent, compared to 8 percent among all others), those with annual incomes under $30,000 (15 percent, compared to 8 percent among all others), and non-white investors (12 percent compared to 8 percent) report holding ESG investments most frequently,” according to the survey.
Bottom line: ESG will continue having its share of critics, but it’s also relevant for advisors looking to add value for clients.