Analysts say that a new generation of investors are increasingly embracing socially conscious investment decisions.
While many experts remain skeptical of making investment decisions based on environmental, social and corporate governance (ESG) factors, critics who once held the high ground of quantitative and rational analysis are starting to admit the tide is turning.
According to some observers, long-held concerns about the limited number of ESG funds and the impact they have on financial performance are giving way to an appreciation for the added intelligence ESG factors reveal about the potential of investments.
“ESG is rooted in improving the investment outcome, rather than some other goal which may not be investment-oriented, and that’s where we’re seeing some convergence,” Chris McKnett, head ESG strategist at State Street Global Advisors, told Investment News.
According to the same outlet, the evidence is that true believers—which now go far beyond the social activist community that pushed the agenda in the past—are beginning to appear within traditional financial services firms. Those firms are joined by ESG-focused money managers in realizing the value of scouring data.
“In general, companies with the strongest records on employee relations and environmental sustainability, for example, often have better financial performance over the long run than those with the weakest records,” Sonia Kowal, president of Zevin Asset Management, a $600 million firm that exclusively builds ESG portfolios, told Investment News.
“Given this, why wouldn’t you use this information advantage when looking for investment ideas?”
Strategies around “responsible investing” have broadened since the early days of simply rejecting certain firms or industries.
Yet today there is a serious rethink taking place in the financial services industry and broader investment community about what ESG ratings can show us about a potential investment.
“If you’re not looking at ESG factors, you’re not looking at the whole picture,” Ms. Kowal said. “Companies that are factoring in the cost of carbon emissions are ahead of the curve,” Ms. Kowal said. “Do you really want to hold a carbon-intensive company that’s not thinking about this?”
Nevertheless, according to the InvestmentNews Research white paper “The Rise of ESG Investing,” which was published last year and included a survey of 475 advisers, many financial advisers still look at ESG investments suspiciously.
Two of the top reasons given by advisers for not using ESG investments were limited investment opportunities (29 percent) and poor or limited returns (22 percent).
That said, according to a recent survey by Investment News, almost half of advisers, view ESG investing as a long-term trend and expect that within three years, about a third of their clients will be allocated to ESG strategies, up from about 20 percent now.
“About 30 percent of our clients are invested in ESG strategies, but about 70 percent of our new clients are investing in ESG,” said Mitchell Kraus, a partner at Capital Intelligence Associates Inc. “It’s the fastest-growing part of our practice.”
In short, many in the financial industry view a not-too-distant future where non-traditional drivers of return from ESG factors—such as managing carbon emissions or focusing on boardroom diversity—become known as the primary drivers. And that’s when financial advisers will have to take notice.