"The whole goal is to assure that investors work toward a livable planet."
Often thought of as the province of millennials, it turns out people of all ages are investing in assets that reflect their personal values. Many more are waiting and watching. These investors want a lot more from their portfolios than maximised profits. They want a better world.
ESG (short for environmental, social, and governance) is the fastest-growing trend in personal investment, posting a 40% gain in 2020 and 2021. The lion’s share of ESG investments are hitched to environmental sustainability, but social impact factors such as racial equality, women’s civil rights, and poverty relief also drive the market. Curated ETFs in the space have been popping up like dandelions.
This emerging investment space is not without its problems. There is the issue of “greenwashing”. Industry experts seem to agree that certain companies market their products and practices as sustainable despite evidence to the contrary. A nearly complete lack of ESG reporting regulations makes such marketing possible. In addition, surveys show investors worry that choosing values-driven investment means sacrificing profit for the greater good.
Perhaps, most significantly, the population of investors pondering values-driven investment is 2 to 4 times greater than the group that has already taken the plunge. Just 1 in 4 investors holds dedicated ESG assets, according to several studies. Still, that 25% represents a lot of investors.
Those who have shepherded ESG into the mainstream acknowledge big challenges, but there is a lot of excitement in the ranks. Amy Domini is an ESG pioneer who has watched the vertical grow from niche to Bloomberg mainstay. The founder and chair of Domini Impact Investments was a guest on public radio’s Marketplace in early July:
The whole goal of the industry is to assure that investors work toward a livable planet, inhabited by people who lead lives worth living…. To have the main Wall Street firms join into this initiative is a tremendous win for my industry. It brings to the table the biggest footprints on this financial system.
With appeal across all age groups growing, ESG’s global share is soaring. Assets are expected to hit or surpass $41 trillion by the end of 2022 and $50 trillion in 2025, according to a a study by Bloomberg Intelligence. The COVID-19 pandemic has been a tipping point for ESG approaches, acting as a catalyst for greater consideration of values-driven factors in both investors and corporate decision-making.
While the emerging ESG space in mainstream investing is a newfangled thing, the idea of using one’s money to influence causes or support personal values is not. Originating as more of divestment than investment strategy in the 1960s, pools of investors began excluding stocks or entire industries from their portfolios based on business activities such as tobacco production or involvement in the South African apartheid regime.
Today’s values-driven investors are far more proactive. They want to contribute to companies using capital to help solve the largest problems facing the globe and its inhabitants. For people aged 25 to 39, that most likely includes companies working toward net zero fossil fuel output. For people 55 and older, gun control and data fraud are among the top concerns.
In all cases, today’s investors are looking for a sophisticated snapshot of companies’ practices – and the business world is responding. Though not yet a part of mandatory financial reporting in most countries, companies around the globe increasingly disclose at least some ESG data in annual reports or standalone sustainability documents. Still, many investors are putting off ESG investment. They simply don’t believe companies’ claims about their environmental and social impact, especially since companies in most countries lack regulatory oversight. NerdWallet surveyed 2,000 people for a 2022 report:
More than three-quarters of investors (77%) believe many companies that promise to operate in socially responsible ways don’t actually follow through. Close to the same proportion (73%) think it’s difficult to figure out whether socially responsible investing actually benefits society.
In lieu of official reporting mandates, some nonprofits are moving to establish reporting standards. The San Francisco-based Sustainability Accounting Standards Board, for example, has created industry-specific sustainability disclosure standards for 77 different industries. SASB is working with other nonprofits, such as London-based International Integrated Reporting Council, to establish a uniform ESG reporting mode that will offer investors reliable and comparable global corporate information.
So how are companies holding themselves accountable? PricewaterhouseCoopers (PwC) is held up as an example of success. The London-based professional services giant was named a global leader in the ESG space by research and advisory firm Verdantix. Known for its advanced reporting and transparency, PwC has a 1,900-member, multidisciplinary ESG team handling all aspects of PwC’s commitment to achieving net zero greenhouse gas emissions by 2030. Detailed reports on the corporation’s ESG-related work are posted regularly on the site and shareholders are offered a variety of digital tools that enable them to track the connection between their investments and corporate governance.
There’s no doubt that Americans are warming up to ESG. Women are doing so a little faster. A 2020 poll by Cerulli Associates found that 52% of women and 44% of men would prefer to invest in companies that had a positive social or environmental impact. Asking a slightly different question, a 2020 survey by Visual Capitalist found that 80% of all those interviewed said they were interested in ESG investment.
Some investors have expressed concern that they would sacrifice profit with ESG. A CNBC analysis that looked at numerous surveys found investors might be mistaking the brutal effects of 2022’s inflationary period for poor ESG performance. In truth, much of the market is in freefall. Netflix share prices, for example, plummeted 71% in the first half of 2022. Facebook’s parent company Meta saw its share price fall 52% in the same period. Jon Hale, director of sustainability research for the Americas at the Morningstar-owned Sustainalytics, had this to say:
“For investors and advisors who have been hesitant to invest in sustainable funds because they are under the impression that such funds as a group chronically underperform,  is further evidence that this isn’t true — as are the past five years.”
ESG will ride out inflation and a recession if necessary. On this point, industry research seems to line up. An article in Barron's suggests all one need do is check out the 2021 launch of the BlackRock U.S. Carbon Transition Readiness ETF.
The BlackRock U.S. Carbon Transition Readiness ETF (LCTU) raised $1.25 trillion initial assets on its first day of trading, marking the largest ETF launch of all time.
As the sustainable investment business grows larger, fund managers are facing ever more complex challenges and stricter scrutiny. Investors want better products beyond vague languages and a few exclusionary screens. And the huge opportunity means competition for new assets would be even more fierce.
The breakneck evolution of ESG investing was analysed in an executive summary released in June by Harvard Law School's Forum on Corporate Governance. ESG, the summary explained, hasn’t just hit the mainstream; it’s becoming the mainstream: “Investors are moving away from basic screening methods towards more targeted and sophisticated strategies, including thematic and impact investing. Meanwhile, ESG integration remains the top implementation strategy — showing how investors are taking a holistic approach as they look to comprehensively embed ESG into the investment process.”
Image by VectorMine
Tamara Kerrill Field’s writing and commentary on the intersection of race, politics and socioeconomics has been featured in USNews & World Report, the Chicago Tribune, NPR, PBS NewsHour, and other outlets. She lives in Portland, ME.