With ESG, Investors Do Take It Personally
Increasingly, investors are adopting the principles of ESG (environmental, social, governance) investing, also commonly known as “sustainable investing.” Investments reflecting ESG values can range from a non-fossil fuel energy company to a firm that promotes gender and racial diversity. But how enthusiastic is the investor embrace of ESG?
CNBC reports, “ESG funds captured $51.1 billion of net new money from investors in 2020, a record and more than double the prior year.” Not only did that money double in a year, according to CNBC, “ESG funds accounted for about a fourth of the money that flowed into all U.S. stock and bond mutual funds last year.”
Of course, values-driven investing isn’t all that new. For example, investors driven by religious beliefs have long avoided assets that would violate their ethical worldview. In the 1950s, according CNote, a diversity driven investment website, investors started avoiding what were called “sin stocks”—that is, stocks from firms that produced alcohol and tobacco or promoted gambling.
Then came the turbulent societal upheaval of the 1960s and 1970s with the civil rights, women’s liberation and environmental movements occurring simultaneously. As a result, the nation’s politics and culture took a sharply liberal turn and “raised the consciousness” of investors. That, in turn, gave rise to socially responsible investing, or SRI, the precursor to today’s ESG investing. But, according to the CFA Institute, the two differ in an important way.
While SRI “typically used value judgements and negative screening” to guide investment choices, ESG investing and analysis “looks at finding value in companies—not just at supporting a set of values.” So how are today’s ESG investors seeking out value and values?
According to Ash Daggs, senior relationship manager at banking and wealth management firm Boston Private, an SVB company, basically there is a “three-step triggering process” that produces ESG investing. “The first trigger,” Daggs says, “might be world events, or events in the community in which you live.”
He cites an example that occurred on the U.S. West Coast. When the pandemic caused a steep decline in human activity there, it reduced smog so dramatically in Southern California that residents living near the San Gabriel Mountains saw that mountain range for the first time.
“That kind of external stimulus,” Daggs says, “then triggers changes in clients’ attitudes and their personal behavior. And that, in turn, makes them more amenable to ESG investing opportunities we may consider.”
To further explore Daggs’ three-trigger process—in particular among high net worth (HNW) individuals and households ($1 million to $15+ million)—Boston Private took a deep dive into the ESG phenomenon. The firm’s second installment of its comprehensive survey of HNW individuals and families, The WHY of Wealth 2021, confirmed that sustainable behavior triggered by one’s environment matched one’s proclivity to sustainable investing.
As the survey reports: “If respondents practice recycling, buy sustainable products, use clean energy and generally try to live sustainably, then it is more likely they will want to align their investments with these values.”
Says Daggs, “Over the last several years, ESG has become part of almost every conversation we have with clients, and for most of them fostering sustainability is pretty personal. So, sustainable behavior and ESG investing go hand-in-hand.”
The Boston Private survey broke out ESG attitudes and actions into four age and income groups and uncovered some notable generational differences in sustainable behaviors. But, when it comes to the highest income group, $15+ million,all age groups at that income level are less likely to use clean energy (25 percent versus 39 percent for all respondents), to recycle (47 percent versus 73 percent overall) and to seek out sustainable products (30 percent versus 35 percent overall).
The survey delivered some surprises. For example, while almost three-quarters (73 percent) of respondents recycle, the survey’s Baby Boomers and the Silent Generation group recycle (84 percent) more than Generation X (63 percent). The oldest generation under review also aims to reduce water consumption (43 percent). The survey postulates that perhaps Boomers want to “save the planet for their children and grandchildren,” not to mention, they grew up in a more frugal and less consumptive era.
As to those “sin stocks” of the 1950s, interestingly, less than half of all survey respondents said they would avoid “companies involved in activities related to weaponry, gambling, tobacco or fossil fuels.” And the survey also produced what the report calls a “striking finding” regarding carbon emissions: “Baby Boomers and Silent Generation respondents are the least likely to invest in carbon emitters and companies involved in the activities mentioned; of them, 62 percent would refuse to invest in either category.”
Daggs also found this Boomer result unexpected, but he offered at least a partial explanation. He points out that someone with $40 million can afford to say, “I don’t want any carbon emitters in my portfolio, and I don’t care if that benefits me or hurts me over the long run.” Whereas younger investors who are building their wealth simply must be more pragmatic.
That said, when it is assumed an investment “will produce good returns,” all respondents show a strong appetite for ESG firms, and in this order: companies pursuing environmental goals (81 percent), alternative or renewable energy projects (79 percent), companies pursuing governance goals (74 percent), ESG/sustainable funds (69 percent) and companies with social issues (67 percent). And millennials show the biggest appetite for these investments: 80 percent “would invest in companies with social issues.”
Clearly, the Boston Private survey shows that ESG investing is highly diverse and complex. Daggs’ “three-trigger process” does strongly suggest that changes in personal sustainable habits are often reflected in ESG investing. But there are myriad reasons why a person of a certain age or wealth level chooses sustainable investments. Still, whatever their reasons for embracing ESG, that embrace is proving to be good, not just for portfolios, but for the planet.
This article was developed and paid for by Silicon Valley Bank.