August 2, 2022 at 5:00 am ET
Future of ESG Investing Unclear Amid Inflation, Regulatory Scrutiny
Morning Consult financial services analyst Charlotte Principato analyzes investors’ current understanding and prioritization of ESG investing
The lack of understanding and conviction around ESG investing may mean fewer inflows to these funds as consumers reevaluate their portfolios amid mounting inflationary pressures. The market may also force out ESG funds’ biggest champions — younger investors — despite their desire to invest more.
Investment advisers have long been trying to understand consumers’ attitudes and knowledge about ESG investing, even as the industry has struggled to define what the term means and how to measure it. Now, ESG investing is facing both its first prolonged bear market since its 2019 boom and increased scrutiny from the public and regulators, further obscuring the future of consumers’ commitment to it.
Here’s what we know about current ESG investing attitudes and investors’ plans for the future.
Most investors don’t know how much of their portfolio is invested in ESG-related funds
Critics say that ESG investing has been used as a marketing tool to attract young savers who want to make a difference through their investing (and will pay a premium in fees to do so); while there may be some truth to this statement, the marketing clearly suffers from lack of clarity.
Nearly a third of U.S. investors (30%) say at least some of their portfolio is dedicated to ESG investing; however, a greater share — more than half — are unsure how much of their investment portfolio is allocated to these specific investments.
Investors’ estimates of how much of their portfolio is in ESG-related funds
Survey conducted June 30-July 3, 2022, among a representative sample of 1,080 investors, with an unweighted margin of error of +/-3 percentage points.
Consumers might not be terribly accurate when estimating how much of their portfolio is allocated to certain types of funds — perhaps they wouldn’t be able to answer this same question if it were posed about tech or fossil fuel stocks, for example, but these types of investments haven’t had nearly the same marketing or societal focus as ESG in recent years. It’s clear that despite the fever-pitched talk of ESG initiatives by companies in earnings calls and advertisements, there are still many confused, albeit eager, consumers. That confusion and eagerness, however, may turn to ambivalence and frustration as investors — especially young ones — are forced to make tough decisions during a time of rapid, historic inflation.
Young investors want to increase ESG investments, but are most likely to be exiting markets
Over half of Gen Z and millennial investors (55%) said they have ESG investments, compared with only 15% of baby boomer investors. In addition to being most likely to have ESG investments, younger investors are also most likely to be optimistic about their future investing plans in the category. Forty percent of Gen Z and millennial investors want to increase their ESG investments next year, compared with just 24% of all investors.
How well younger investors are able to meet their ESG investing goals will depend on the broader macroeconomic environment; if inflation continues to impede their ability to save, they may be forced to cut down or stop investing altogether. Morning Consult data indicates that this shift may already be occurring. Fewer Gen Z adults and millennials are investing compared with last year, changing the demographic makeup of investors.
In addition to inflation, the regulatory and political environment will also have an impact on young investors’ goals. When the Securities and Exchange Commission imposes new standards for ESG measurement and disclosures, some of what investors thought were ESG investments may not be after all, and marketers and investment advisers will need to speedily re-educate and advertise their offerings to consumers. This may be welcome to some consumers looking for more confidence that their ESG investments are legitimate, but it may turn off frustrated consumers who feel the investment category was all a farce.
ESG investing is increasingly becoming a target for Republican politicians, and although Republican investors are less likely than their Democratic counterparts to invest in ESG funds and think of increasing their ESG investments next year, they could still depress overall ESG investing if they pull their ESG-related investments.
At the end of the day, ESG isn’t an investing priority for most
The preceding scenarios assume that ESG investing is a priority for investors and that, during this time of economic turmoil and reckoning over its meaning, consumers will pay special attention to their ESG investments. That’s not likely to be the case for most investors.
When asked how much of a priority ESG investing is to them, most consumers say it isn’t. Only 35% of investors said ESG investing is a top or important priority for them, with younger investors again leading the charge. A majority (54%) of Gen Z and millennial investors said ESG ratings are a priority when they’re making investing decisions.
How investors prioritize ESG ratings when making investing decisions
Survey conducted June 30-July 3, 2022, among a representative sample of 1,080 investors, with an unweighted margin of error of +/-3 percentage points. Figures may not add up to 100% due to rounding.
The reason ESG funds may be a lower priority for investors overall is because of their belief that it is important to prioritize profitable investments over socially responsible ones. But investors are also likely to believe that this is a false trade-off — something investment advisers and ESG proponents have tried to prove, with varying degrees of success, over the last several years. Nearly 7 in 10 frequent investors believe ESG and socially responsible investments are profitable in and of themselves.
But more importantly, it’s hard to prioritize something you can’t assess; 80% of investors said it’s hard to prove whether a company is as environmentally friendly as it claims to be. Increased regulation of reporting requirements for companies could significantly improve the average investor’s ability to feel confident in their ESG investments, and thus make them more willing to dedicate a larger share of their portfolio to them, but until then, the negative conversation around ESG and its lack of transparency may turn off some investors at the precise moment that inflation is forcing them to reprioritize or lower their overall investments.
Investors aren’t hearing anything from financial advisers about ESG — but they should be
During this ESG reckoning, financial advisers appear to be rather silent, at least in terms of their client relationships. Only 14% of investors said an investment manager has spoken to them about sustainability or ESG.
Investors aren’t turning to financial advisers for advice or education in this category, either. Even among investors who allocate at least some of their portfolio to ESG, most don’t go to financial professionals for information on the topic. Company websites are the most popular source for ESG-related information, with 40% of these investors saying they use them. Financial advisers are the second most popular source at 37%, but social media is a not-too-distant third at 30%.
If they hope to continue encouraging ESG investment and reaping the increased fees that follow, now is the time for financial advisers to be checking in with clients about their ESG priorities, addressing concerns about the efficacy of ESG ratings and giving clients a basic understanding of the category. The next few months, as consumers wade through economic uncertainty and make sense of the changing ESG landscape, will be crucial in cementing or dissolving their commitment to it.