ESG may not be the engine of the fresh investment money Wall Street expects
It may seem like a wall of money is pouring into sustainable investing, but Morningstar researchers suggest that this view may be too simplistic.
While most people say that they are moderately interested in investing in companies that perform well in terms of environmental, social and governance indicators, they consider this to be just one of many factors. their decision and may not follow through with money.
A study by the US SIF Foundation, which tracks environmental, social and governance investments, shows that this style of investing represents 33% of US assets under professional management. Additionally, various investment surveys show greater client demand for fund managers to incorporate ESG factors.
Yet investors always focus on their financial goals first when it comes to investing, prioritizing standard investment metrics, two Morningstar researchers found.
For some investors, having a choice of two high performing funds, one with a measure of sustainability, such as diversity, and the other without an ESG measure, the ESG fund was given the green light, suggesting that sustainability was a sharing.
However, when ESG choices were offered as part of complex investment decisions, such as retirement investing, people tended to be less interested. This may reflect both the difficulty people have in making investment choices for retirement and the lack of knowledge about sustainable investing, said Steve Wendel, head of behavioral sciences at Morningstar, and Samantha Lamas, behavioral researcher at Morningstar, to attendees at a recent Morningstar Investment Conference. , citing unpublished research.
Ultimately, their initial research shows that there is no one-size-fits-all choice for ESG investing. “There is no simple statement that can be made about investor behavior, investor practices and sustainable investing,” said Wendel.
He and Lamas are continuing their research on the behavior of investors in terms of sustainable investing.
For financial advisors, talking about ESG with all of their clients could be a way to have more in-depth discussions about clients’ financial goals and risks, as Morningstar research suggests advisers can’t presume who would be interested. or not. Additionally, ESG investing needs to be personalized as it can be very diverse, from excluding certain types of investment to investing to make an impact. It also means explaining what sustainable investing is because it remains poorly understood, Lamas said.
“The story we see is that people invest because they want to achieve their financial goals. For some people this means deeply integrated their understanding of risk, environmental risk and (and) a variety (other) risks. But it serves to meet their financial goals, ”he said, noting that like anything else, ESG is only one factor among a variety of factors.
What advisers say
Two financial advisers who offer ESG investments echoed some of Wendel and Lamas’ findings. Both are seeing a resurgence of interest in ESG investments over previous years, especially among people with assets.
Jason Escamilla, CEO of Impact Advisor, says his company has been offering ESG investments since the late 1990s. Historically, people who were interested in ESG were younger with fewer assets or institutions with some. investment mandates, but since the pandemic he’s seen wealthy older people seek out his company for its ESG investing expertise.
Charles Hamowy, CEO of Seasons of Advice Wealth Management, dates increased interest in sustainable investing in the school shooting in Parkland, Fla., When clients began asking him how to exclude gun ownership in their funds. After these discussions, his company began creating portfolio options to allow people to filter out areas that conflict with their values. He says that over the past three years or so, ESG investments have made up around 25% of his clients’ assets.
Both advisers say ESG is just one factor for their clients, especially those with more assets and investment knowledge. Escamilla claims that its high net worth clients do not exclusively view an ESG offering as the key decision point when deciding whether or not to invest with it.
“Tax efficiency, multi-account management, financial planning, access to an advisor, firm / advisor confidence and estate planning expertise are also important,” he said.
Hamowy also noted with limitation with his clients the transition to a sustainable portfolio.
“We don’t offer as much (shift to sustainable investing) in non-retirement accounts, because then converting to that would result in income tax. People want to save the world, but not necessarily pay more taxes, ”he said.
Now read: 3 questions to ask your financial advisor if you’re serious about sustainable investing
Debbie Carlson is a MarketWatch columnist. Follow her on Twitter @ DebbieCarlson1.