ESG Investing: Facing Headwinds or Backed by Tailwinds?

ESG investing

The winds are blowing around ESG investing, where advisors may have a bigger opportunity than they thought

A recent report found that ESG investments face “headwinds” in making their way into more 401k investment menus—mainly due to a lack of participant interest and the questionable notion that it entails a trade-off in performance—but now a new study says most individual investors are nonetheless interested in exploring Environmental, Social and Governance (ESG) investing strategies.

And advisors may be slow to recognize an important investment trend.

While three in four individual investors in the survey say they want their investments to align with their personal values, just 17% of advisors think they need to be better at explaining ESG investing to their clients, according to Boston-based Natixis Investment Manager’s ESG Investing Report 2019.

The survey questioned financial advisors and institutional investors (in the U.S. and globally) about the views and issues that drive their decisions on ESG investing.

It found that the potential to support personal values while meeting portfolio objectives may be a critical reason why demand for ESG strategies is strong among investors, but the findings also reveal that investors’ need clarity on how ESG is implemented—and why.

Sixty-one percent of investors in the U.S. believe companies that demonstrate higher integrity will outperform. The study also showed half of investors globally aren’t willing to sacrifice returns to achieve sustainability goals.

“Today’s investors expect the best of both worlds—investments that generate positive performance and also support the values and causes that matter to them—and those two worlds are increasingly merging,” Harald Walkate, Head of Corporate Social Responsibility and ESG for Natixis Investment Managers, said in a statement. “Driven by a genuine convergence of goals, the future of ESG investing is gaining positive attention and popularity across intermediaries. The task now is to further refine the investment processes, develop well-defined metrics and continue to improve transparency.”

Financial advisors may be missing an opportunity

For financial advisors, closing the information gap could be a significant step to enhancing long-term client relationships.

Nine in 10 (88%) advisors globally say that the key to their success is their ability to demonstrate value above and beyond asset allocation. Being more attuned to client values could be a clear point of distinction for advisors, and ESG investments are an important way for them to differentiate themselves. But Natixis found the conversation that’s happening today could be clearer.

While they may feel comfortable with their understanding of ESG, the study found many advisors actually have a limited view of what ESG investing means. When asked to define ESG, a third (33%) say it means negative screening, 20% describe it as incorporating companies’ ESG decision-making into the investment process, 19% impact investing and 19% thematic investing.

In order to properly advise their clients, financial intermediaries themselves need a better, clearer understanding of ESG. That said, 62% of U.S. advisors currently say they are more likely to recommend ESG products to their clients if there is better data and reporting on these investments.

Despite positive perceptions and growing demand for investments that reflect their values, Natixis found that investors are not blindly accepting when it comes to ESG investments: Many want more information to support their ESG investment decisions.

Only half (50%) of investors in the U.S. say they have the information they need to make socially responsible investment decisions.

Partly as a result of uncertainties about whether they have enough information about ESG investments, many investors are unsure of how—or whether—they can influence change through their investment decisions.

Fewer than half of U.S. investors (44%) believe their investments can have a positive impact on the world. However, Millennials have a more optimistic view, with 56% believing their investments can be a tool for positive change.

Investors positive about ESG, but see challenges to adoption

The best indicators of ESG’s growing acceptance among institutional investors: More than half (55%) expect to increase their ESG allocation this year, and 65% think ESG will become an industry standard within the next five years.

Although more than half of institutional investors believe there is alpha to be found in ESG, 43% said the lack of well-established track records and difficulty measuring performance are challenges they face.

These investors also express concerns about false or exaggerated commitment to ESG-friendly policies—so-called “greenwashing” (40%) and the lack of transparency (37%) in the investing process. Because of this, 36% worry that short-term performance goals and long-term sustainability goals could be in conflict.

“Investors have made clear their interest in ESG strategies: Now, the industry has to prove it can deliver across the board—on both values and performance,” said Dave Goodsell, Executive Director of Natixis Investment Managers’ Center for Investor Insight. “Institutional investors, financial advisors and asset managers will need to work together in a concentrated effort to ensure greater acceptance of ESG investing.”

3 ways to shape long-term acceptance of ESG

Natixis found that closing the information gap on what ESG is and how it can be used in investment decision-making is essential to increasing ESG adoption. Based on the study’s findings, there are three steps the financial industry can take:

To download a copy of the full report, titled “Looking for the Best of Both Worlds,” visit www.im.natixis.com/us/research/esg-investing-report-2019.

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