Clients looking to invest in so-called ESG investments may have many things in mind besides making a profit, such as fighting climate change or promoting fair labor practices abroad.
But that doesn’t mean that those most committed to the cause don’t care about the end result either. Survey by the National Bureau of Economic Researcha non-profit organization in Cambridge, Massachusetts.
A study of nearly 20,000 online surveys collected from clients of wealth management giant Vanguard Group found that investors generally saw slightly lower returns from portfolios dedicated to supporting environmental, social and governance objectives. I understand that you are expecting However, there was a strong expectation among investors setting aside large sums of money for ESG that their portfolios would outperform the general market. Even though they cited ethical concerns as their primary motivation, it was true.
“The findings suggest that traditional investment motivations remain a key driver of portfolio allocation, even among respondents who believe there are important non-monetary reasons to invest in assets with strong ESG characteristics. , at Stanford and other universities, with the help of Vanguard researchers.
Good investment in flames
The general idea behind ESG is to provide an avenue for investors to direct their money to companies whose business models align with their ethical preferences and personal objectives. Those worried about climate change can, at least hypothetically, put their money into funds that invest in green energy companies and avoid carbon-emitting fossil fuel companies. Investors sensitive to child labor practices in a particular country can invest in companies that do not operate in that country.
The US SIF, a non-profit organization that promotes “sustainable and responsible” development, announced in early 2022 that the United States will About $8.4 trillion in assets under management Invest in companies that take ESG goals into account.
ESG has been around for decades, but has turned into a political topic in recent years. In March, Republicans in Congress passed a bill that overturned the bill. Ministry of Labor Regulation Permit Expanding ESG investing with 401(k) and similar retirement plan advisors. President Joe Biden vetoed the bill later that month. The backlash comes as ‘green’ labels and benchmarks proliferate, causing confusion among investors and ‘greenwashing’ by companies trying to sell their credentials.
Some of the controversy centers on the question of whether ESG investors are being tricked into believing that they can achieve returns as great as following traditional investment strategies. Countless studies on ESG fund returns show Mixed results.
Low understanding by individual investors
A National Bureau of Economic Research paper suggests that ESG strategies are still being adopted by only a minority of investors. Only 3.5% of respondents said they had money in ESG funds, according to a Vanguard survey.
Respondents generally expected lower returns from ESG strategies. They predicted that returns from ESG investing will lag general stock market returns by an average of 1.4% over a decade.
The survey also asked respondents what they think are the best reasons for an ESG strategy, regardless of whether they have adopted one. Only 7% said returns were their main motivation. About 25% said it was based on ethical considerations, and 22% said they would like to invest their money in companies with climate-resilient business models. The remaining 45% said they had no reason to invest in ESG.
However, among actual ESG investors, respondents who cite ethical considerations as their primary concern are more likely than others to invest in ESG, even if they consider their returns to be lower than average. Research has shown that it is possible.
According to the paper, “This suggests that ethical motivations may induce willingness to give up economic gains.” We see a positive relationship between ESG returns, with investors expecting ESG to outperform the market hold a much larger share than those expecting to underperform.”
That’s pretty much in line with what Mitchell Krause, wealth manager at Capital Intelligence Associates in Santa Monica, California, sees for his clients. Krause said he was rarely asked about ESG (or formerly known as socially responsible investing) during his first 20 years in the industry. It was here in his decade that he began answering questions on a regular basis.
“Often, people will say, ‘I’ve never been interested before, but I’m listening to you and on some level, I’m interested.
Of course, just as opinions on ESG vary widely within the United States, so do Kraus’ clients. A woman called me and said, “I hope you haven’t invested my money in (abusive) ESG funds,” Krause said. He explained that he would never put a client into an investment strategy he believed would not suit his wishes.
Jamie Ebersole, founder of Ebersole Financial in Wellesley Hills, Massachusetts, estimates that less than 10% of clients come to him with questions about ESG investing. The majority are interested in finding ways to hedge against equity and bond market volatility and improve portfolio performance.
Ebersole will bring ESG to most customers, but few hold strong beliefs about it. He said climate change tends to be the biggest concern, especially among those who come to him for it.
“Next are areas like strong corporate governance, board diversity and environmental pollution,” Ebersole said.
Krause said he was careful not to overpromise the benefits of ESG investing, but not to underestimate the benefits. When he started working as his manager at Wealth in the 1990s, he said it was almost impossible to beat the market using strategies that avoided investing in tobacco companies. Now there are more opportunities for those who don’t want to put their money in a for-profit prison, for example.
However, as with any investment strategy, it is virtually impossible to predict the combination of factors that could cause a particular ESG investment to rise one year and fall the next.
“I would say 90% of the time it either works or it doesn’t hurt,” Krause said. “At the same time, restricting investments in a way that doesn’t consider the market as a whole inevitably exposes you to different types of risk.”
The National Bureau of Economic Research paper summarized the results of an online survey that asked three questions of Vanguard customers, 80% of whom were individual investment accounts and 20% of whom were retirement plan holders. The first asked us to estimate her 10-year return from the ESG portfolio. The second asked them to select their best reason for adopting an ESG strategy and allowed the following responses: no reason, excessive financial returns, non-monetary ethical considerations, and hedging against climate change. . The third question sought to gauge how concerned you are about climate change.
Responses were compiled from a series of 10 surveys conducted between June 2021 and December 2022. Each survey received approximately 2,000 responses.