If you’re a registered investment advisors that feels as though client inquiries regarding environmental, social and governance (ESG) or sustainable investing are falling off, you’re probably right.
Rampant ESG political discourse, rising concerns about greenwashing and worries about performance of ESG stocks against the backdrop of rising interest rates are among the factors conspiring to weight on clients’ once fervent enthusiasm for ESG.
“Higher interest rates are impacting these companies' finances,” notes Jeffrey Kleintop of Charles Schwab. “The stocks in the MSCI World Alternative Energy Index have a leverage ratio of 3.8, based on debt-to-12-month earnings, compared with just 1.1 for the five biggest energy producers by market capitalization. That means higher financing costs are much more costly for these companies.”
All of the above factors and points are true. However, that doesn’t imply advisors can take their eyes off the ESG ball or that clients won’t renew affinity for this style of investing. Actually, it’s likely they will again flock to ESG and sustainable investment options and that could happen sooner than later. Advisors need to be prepared for that potential groundswell.
ESG Growth Still in Place
For all the criticism of ESG – there’s plenty – data suggest the related funds are still attracting capital. Morgan Stanley’s Institute for Sustainable Investing notes that in the first half of 2023, assets under management at sustainable equity and fixed income funds increased 7.9%.
That growth belies the negative headlines pertaining to ESG investing, but alone, that might not be enough for advisors to perk up about ESG. Perhaps the following will provide the needed motivation.
“Demand from Millennial investors—paired with new government incentives and regulations—will likely fuel the presence of sustainable investing in new asset classes and themes in the next 10 years. Essentially, all surveyed U.S. Millennials (99%) indicated they were interested in sustainable investing, according to a 2021 report from the Institute. If that demographic follows through on its intention to invest, there will likely be a greater breadth of solutions across the market,” notes Morgan Stanley.
There are other reasons clients are likely to remain ESG-interested or get there. Those include more robust regulations that should bolster ESG clarity and potential intersection with high-octane market segments.
“For investors, more robust corporate ESG disclosures means that specific and standardized information will be in the public domain to use when evaluating a company’s sustainability performance, including around revenues, corporate practices and supply chains. ESG data will likely also improve significantly as modeling techniques using artificial intelligence are applied to the space,” adds Morgan Stanley.
For Some Clients, ESG Still Has Merit
While there’s ample criticism of ESG investing strategies and rightfully so, advisors should not get bogged down in the political debate side of the ESG equation. That’s guaranteed to be off-putting to many clients. Just deal with the facts and one of those is some clients are unlikely to ever warm to ESG while other clients are embracing it and may want more of it in their portfolios.
Plenty of surveys confirm that market participants remain enthusiastic about responsible investing, in particular, younger demographics who crave values-based investment solutions. That is to say advisors cannot take their eyes off the ESG ball. Not when clients are demanding access to these solution and not at a time when clients believe advisors are useful when it comes to attaining ESG advice and building portfolios to that effect.
Additionally, advisors should expect ESG/sustainability to evolve and that evolution could generate more interest among clients.
“The urgency for even more capital at scale to finance innovative sustainability solutions is clear, as companies race toward a net-zero energy transition and demand grows to finance additional and interrelated issues important to global economies, such as gender equity or ocean conservation,” concludes Morgan Stanley.