It may seem that a wall of money is flowing to sustainable investing, but researchers at Morningstar suggest this view may be too simplistic.
While most people say they are moderately interested in investing in companies that score well on environmental, social and governance metrics, they consider it just one of several factors in their decision and may not follow through with cash.
Research from US SIF Foundation, which tracks environmental, social and governance investing, shows this investing style accounts for 33% of U.S. assets under professional management. Additionally, various investing surveys show greater client demand for money managers to incorporate ESG factors.
Yet investors still focus on their financial goals first when it comes to investing, prioritizing standard investing metrics, two Morningstar researchers have found.
For some investors, given a choice between two high-performing funds, one with a sustainability metric, such as diversity, and one without an ESG metric, the ESG fund got the nod, suggesting sustainability was a tiebreaker.
However, when ESG choices were offered as part of complex investing decisions, such as retirement investing, people tended to be less interested. That may reflect both the difficulty people have with making investing choices for retirement and the lack of knowledge around sustainable investing, Steve Wendel, head of behavioral science at Morningstar, and Samantha Lamas, a Morningstar behavioral researcher, told participants at a recent Morningstar Investment Conference, citing unpublished research.
Ultimately, their initial research shows there’s no one-size-fits-all choice for ESG investing. “There’s no simple statement one can make about investor behaviors, investor practices and sustainable investing,” Wendel said.
He and Lamas are continuing to conduct further research into investor behaviors around sustainable investing.
For financial advisers, talking about ESG with all of their clients might be a way to have deeper discussions about the clients’ financial goals and risks, since the Morningstar research suggests advisers can’t assume who would be interested or not. Further, ESG investing needs to be personalized since it can be so wide-ranging, covering anything to excluding certain types of investments to investing to have an impact. This also means explaining what is sustainable investing since it remains misunderstood, Lamas said.
“The narrative we’re seeing is people invest because they want to make their financial goals. For some people, that means deeply integrated their understanding of risk, environmental risk, (and) a variety of (other) risks. But that is in service of meeting their financial goals,” he said, noting that like anything else, ESG is just one factor in a variety of factors.
What advisers say
Two financial advisers who offer ESG investing echoed some of Wendel’s and Lamas’ findings. Both see a pickup in interest in ESG investing from previous years, particularly with people who have assets.
Jason Escamilla, CEO at Impact Advisor, says his firm has offered ESG investing since the late 1990s. Historically people who were interested in ESG were younger with fewer assets or institutions with certain investing mandates, but since the pandemic, he’s seen older high-net-worth individuals seeking out his firm for its expertise in ESG investing.
Charles Hamowy, CEO at Seasons of Advice Wealth Management, dates a greater interest in sustainable investing to the school shootings in Parkland, Florida, when clients began to ask him about how to exclude gun ownership in their funds. After those discussions, his firm started to create portfolios options to allow people to filter out areas that conflict with their values. He says in the past three years or so, ESG investing accounts for about 25% of his clients’ assets.
Both advisers say that ESG is just one factor for their clients, especially those who have greater assets and investment knowledge. Escamilla says his higher-net-worth clients don’t look exclusively at an ESG offering as the key decision point when deciding whether to invest with him.
“Tax-efficiency, multi-account management, financial planning, access to adviser, trust of firm/adviser and estate planning expertise also matter,” he said.
Hamowy also noted with limit with his clients on switching to a sustainable portfolio.
“We’re not offering (transitioning to sustainable investing) so much in the nonretirement accounts, because then the conversion to that would cause income taxation. People want to save the world, but not necessarily pay more taxes,” he said.
Now read: 3 questions to ask your financial adviser if you are serious about sustainable investing
Debbie Carlson is a MarketWatch columnist. Follow her on Twitter @DebbieCarlson1.
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