What’s Driving ESG Growth?

Written by: Thomas Kostigen

By now investors should know that environmental, social, and governance (ESG) investing is the hottest segment of financial services. In less than five years, the amount of money invested in the ESG sector — whether in mutual funds or direct investments — is expected to exceed $50 trillion. That’s up from the nearly $38 trillion that is currently invested utilizing ESG standards. What’s driving the growth?

New York Life Investments conducted a survey of investment professionals to find out. The top ESG driver, as NY Life puts it, is risk management. Paying attention to environmental, social, and governance issues weeds out risks of exposure to negligence in these areas, meaning there is less of a chance that a company adhering to ESG standards will fall victim to lawsuits, workplace hazards, or improprieties that will have a negative effect on its business. It isn’t a sure bet, but ESG practices can help mitigate downside risks. Investors like that and it makes them want to invest more money in these types of risk-averse companies. 

This may be the reason the second biggest driver of ESG growth is investor demand. Remember, the NY Life survey was conducted on investment professionals. That means they relayed what their clients are telling them what to do with their capital, and these clients are apparently craving more ESG.

The third big driver identified in the survey is fiduciary duty. This is an important insight and it’s very telling. A fiduciary duty means that someone has to act in the best interest of another. They serve as that person’s proxy and are entrusted to do the right thing by them. Investment professionals saying that ESG facilitates their fiduciary responsibility means that they believe ESG investments provide less risk and better change of return —generally speaking—than other investments. That is huge testimony to the soundness and positive direction in which the ESG sector is heading. It should be noted that the Securities and Exchange Commission under the direction of the Trump administration attempted to ban ESG investments from employee retirement plans for exactly the opposite reason of what certified financial analysts (the type of investment professionals surveyed by NY Life) say make ESG investments attractive to them.

The SEC ban is being lifted by the Biden administration, giving investors more choices and apparently investment professionals more of what they want. Because ESG investments are associated with more ethical or “good” investments, financial professionals say this shines nicely on their reputations with clients. Which is why they ranked reputation benefits as the fourth biggest driver of ESG capital growth. If better by association helps investment professionals garner and retain more business, it seems to reason that they would hold themselves out more as closely aligned with ESG values.

The fifth biggest driver and the last on this list is financial returns. I find it super interesting that ESG investments are deemed to outperform other investment categories — and that this is a touted benefit — yet this driver isn’t placed first on the list. It’s the more nuanced attributes that seem to be leading the push of ESG assets under management to new heights.

If you spark to some of the reasons investment professionals are increasingly putting money with companies that fall into the ESG category, then perhaps it’s time to call one of these professionals to have your money invested this way, too.

Thomas Kostigen is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Thomas is a best-selling author and longtime journalist who writes about environmental, social, and governance issues.

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