There is no doubt that ESG-labeled assets are growing.1 U.S. assets invested in ESG strategies topped $17.1 trillion at the start of 2020, up 42% from two years earlier.2 This accounts for nearly one‐third of all professionally managed assets in the U.S. today. This upward trend suggests that many people want their investment dollars to pursue a financial return and positively impact the world. There is also wider recognition that good corporate citizenship can benefit the bottom line. A favorable public image might increase sales and brand value, and conservation efforts can help reduce costs, improving profit margins. Some harmful business practices are now viewed as reputational or financial risks that could damage a company’s longer‐term prospects.3
ESG investment vehicles encompass stocks, mutual funds, exchange‐traded funds (ETFs), and, to a lesser extent, fixed-income assets. As of 2020, there were more than 800 different investment funds in the U.S. that incorporated ESG factors, and that number is expanding rapidly. The U.S. SIF Foundation—The Forum for Sustainable and Responsible Investment reported the following:
That equates to a 232% increase in funds in just eight years. Many of these funds are broad-based and diversified. Some are actively managed, while others track a particular ESG index with its own collection of ESG stocks. It is important to note that ESG criteria can vary greatly from one ESG fund to another, and specialty funds (those that focus on a narrower theme, such as clean energy) can be more volatile and carry additional risks that may not be suitable for all investors.4
Different population segments are more drawn to ESG investing than others. In 2017, Morgan Stanley’s Institute for Sustainable Investing surveyed active individual investors and found that:
- 86% of Millennials5 are interested in sustainable investing or investing in companies or funds that aim to generate market‐rate financial returns, while also pursuing positive social and/or environmental impact.
- Millennials are also twice as likely as the overall investor population to invest in companies targeting social or environmental goals and believe that good ESG practices make better long‐term investments.
- Furthermore, 90% of them say that they want sustainable investing (e.g., ESG investing) as an option within their 401(k) plans.6
As Baby Boomers age and pass down money to their Generation X7 and Millennial descendants, it will be the largest intergenerational wealth transfer in history, with $30 trillion set to change hands over the next few decades.8 Thus, if Millennials are already favorably inclined toward ESG investment practices, and as they grow their wealth through retirement savings, earnings, and inheritance, it is safe to assume that ESG investing will only continue to grow as part of the investing landscape.
I hope you enjoyed the fifth post in our series on Environmental, Social, and Governance (ESG) investing. Check out other posts in the series here:
(1) Yamada, M. (2019, June 13). "Is Corporate Social Responsibility Just a Marketing Ploy". Retrieved from Advisor's Edge: https://www.advisor.ca/columnists_/mark‐yamada/is‐corporate‐social‐ responsibility‐just‐a‐marketing‐ploy/.
(2-4) Broadridge Investor Communication Solutions, Inc. (Accessed 2021, April 23). "Growing Interest in Socially Responsible Investing". Retrieved from https://www.broadridgeadvisor.com/kt/HtmlNL.aspx?pvw=A9FDFD0F708BBE2F96665A46E3B8F 96BC712956751ACE7A5BACA6AB6F4AA678EA2B%E2%80%A6.
(5) Chen, J. (2022, March 16 ). "Millennials: Finances, Investing, and Retirement". Retrieved from investopedia.com: https://www.investopedia.com/terms/m/millennial.asp.
(6, 7, 8) Choi, A. (2018, January 24). "How Younger Investors Could Reshape the World". Retrieved from Morgan Stanley Wealth Management: https://www.morganstanley.com/access/why‐millennial‐ investors‐are‐different.
The views expressed within this newsletter are subject to change at any time without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security or strategy. This material has been distributed for informational purposes only. All investments carry certain risk and there is no assurance that an investment will provide positive performance over any period of time. Because ESG criteria excludes some investments, ESG strategies may not be able to take advantage of the same opportunities or market trends as those that do not use such criteria. John Chichester is an Investment Advisor Representative with Dynamic Wealth Advisors dba Chichester Financial Group LLC. All investment advisory services are offered through Dynamic Wealth Advisors.