The concept of sparking social change with investments is not new, but so-called ESG investing, putting your investment dollars behind companies that promise to do environmental and societal good, has become increasingly popular in recent years — particularly among investors under 40.
Nearly all respondents, 97%, in a new survey from insurance firm Allianz Life, said social responsibility is at least somewhat important to them when they make investment decisions. Additionally, over half, 53%, of those who don't currently have ESG investments said they're interested in getting started. (One of Allianz Life's sister companies, Allianz Global Investors, is specifically dedicated to sustainable investing.)
This year's survey was conducted online and polled more than 1,000 respondents who earn at least $50,000 annually.
Those findings confirmed what many experts, including Todd Hedtke, chief investment officer at Allianz Life, already suspected: Interest in ESG investing is broad, even nearly universal. "I absolutely think there will be follow-through," especially among younger investors, he says. Millennials in particular are "going to be that tailwind to push [ESG investing] forward."
Millennials (those born between 1980 and 1995) are even more bullish on ESG investing than the overall public is: Ninety-nine percent of this generation says considering social responsibility practices are at least somewhat important when making investment decisions, and 4 in 5 support investing in companies with good social responsibility practices, according to the survey.
"Previous generations looked at return more, but I think you're going to see a more holistic investment strategy in the years to come," Hedtke says.
Hedtke's hypothesis is backed up by the numbers: Last year, ESG investments totaled $17.1 trillion, up from $12 trillion in 2018, according to a 2020 study from the Forum for Sustainable and Responsible Investment.
That quick growth, however, means that there are still a lot of kinks that need to be worked out, particularly when it comes to measuring how companies perform on issues of the environment, society, and governance, says Nate Nieri, a certified financial planner and founder of Modern Money Management in San Diego.
"A lot of the reporting is still self-reporting by companies. So you're getting a lot of really large, deep-pocket companies that are able to report on things," Nieri says, while smaller firms that may not have the resources to do that kind of internal analysis could get left out of ESG listings.
Another issue is that a company or firm that may be doing good work in one of the three categories scores poor marks in another, says Carey Morgan, a CFP and partner at Livelihood in Philadelphia. "Just because you're good on one specific issue, it doesn't mean you're good on all specific issues," Morgan says. For example, a company that is exceeding environmental goals may not be meeting standards on gender equality among its workforce, she says. "There's no one magic bullet."
That likely means that investors will have to choose their causes carefully and rank them in order of importance. It may lead to some difficult choices, such as an investor needing to mull whether a company's poor performance on one metric, like gender equity, is outweighed by its fantastic performance in another, such as environmental issues.
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It doesn't help that companies may change their priorities and stop being as ESG compliant as they previously were, Morgan says. "The space is messy. If I put you in a fund," she explains, "we can't promise that they're not going to put a company into that mutual fund that you don't like six weeks from now."
That added vigilance can also make ESG investments more expensive, Morgan says. "There has to be a level of due diligence, so you're going to pay more for that." However, in Morgan's experience, many clients — especially millennials — are willing to pay those extra costs.
Many of the current challenges with ESG investing will likely get solved as increased demand from retail investors, financial advisors, and fund managers push more companies to comply with the spirit of ESG investing, experts agree.
More companies see ESG as not only an effective marketing tool to espouse their values, but also a benefit to their bottom lines, Nieri says. A recent analysis from NYU Stern Center for Sustainable Business found that corporate sustainability initiatives appear to drive financial performance and that companies managing for lower carbon footprints posted better investing results than competitors.
"There's a lot more research being published that there are actual financial impacts related to ESG characteristics," Nieri says. "And then you're having a demand-side push from people from the value side of investment. So I think it's a real phenomenon; I don't think it's going to be something that's just a fad of investing."
Nieri suggests that anyone interested in ESG keep in mind that one investment isn't going to change the world. "It's not black and white; it's very gray," Nieri says. Societal change "takes time. And that's the how I'm looking at my portfolio: It's not perfect. I'm doing the best with the information that's out there, and we're working towards progress."
For example, Nieri might ask clients for a few core values and select funds that meet the top criteria. "I'll look at an index that may weed out tobacco fossil fuels and weapons," he explains.
This kind of investing is likely to get easier as demand steadily increases and more companies get in line with the ESG movement, Morgan says, and that drumbeat will be led by younger investors demanding more of the companies they support with their money. "I hope that essentially, investments will prove to be a mandate for companies to be more accountable to society," Morgan says. "I don't think it's a trend. I think it's a new kind of paradigm."
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