The Investing Enlightenment – ESG on the Rise

nyc esg investing

Dr. Robert Eccles of Arabesque Partners and Mirtha D. Kastrapeli of State Street’s Center for Applied Research recently published an excellent paper titled The Investing Enlightenment: How Principle and Pragmatism Can Create Sustainable Value Through ESG.

With increasing talk and interest around ESG investing on the rise, their paper offers numerous insights and considerations for advisors and investors. Below are some short highlighted excerpts, although the paper in its entirety can be read here:

ESG investing and interest, both globally and domestically, are on an upward trend. Additionally, ESG factors are also seen as signaling tools for volatility and risk.

A recent study by the US SIF Forum for Sustainable and Responsible Investment estimates that there are $8.72 trillion of ESG investments in the US alone, up 33% from 2014. ESG investing now represents about 20% of total assets under professional management in the US. On the academic front, a growing number of empirical studies show a positive relationship between ESG factors and corporate financial performance supporting the premise that ESG can improve financial returns for companies. Research now shows that companies that perform well on material ESG issues have higher financial performance than those that perform poorly on them.

When State Street asked retail investors how they learned about ESG investing, only about a third (38%) said from their financial advisor. The vast majority (83%) answered that their knowledge came from their own research or family and friends. Research now suggests that advisors should expect that an increasing number of their clients will be contacting them about ESG investing.

If advisors want to be able to respond to that interest, they need to have the requisite knowledge to do so. This action requires, of course, additional familiarity with ESG integration and all of its elements and impacts. In the case of individual investors, advisors need to be clear about how they’re taking ESG factors into account in their investment decisions.

According to State Street’s research, 50% of ESG investors say that climate change is factored into their investment decision process in a significant or very significant way. For income equality and gender inequality, that number was 42% in both cases. If these issues are important for individual investors, they can use their portfolio allocation decisions to address these concerns, while at the same time targeting the achievement of their long-term investment objectives.

Financial advisors can, and must, help their clients start thinking about ESG investing. Of course, communication is a two-way street; there’s always the question of who starts the conversation: the advisor or the client. Not surprisingly, more ESG investors (62%) plan to approach their advisor about ESG investing in the next 12 months than non-ESG investors (43%). But this shows interest in ESG investing even by those not currently practicing it.

Further supporting the level of interest in this group is the fact that nearly one-half (49%) of non-ESG investors believe talking to their advisor about ESG investing would be useful. This suggests that there’s an opportunity for advisors who are willing to start the conversation. The fact that 69% of ESG investors also have this view further suggests that major client opportunities exist with ESG investors if financial advisors have the requisite knowledge.

Furthermore, open communication with their financial advisors about their interest in ESG as part of a long-term investment strategy should also result in adjustments to the products and solutions presented to the investor. Financial advisors should be prepared with concrete solutions for these investors, which are only set to grow. In fact, more than half of retail investors say ESG factors will be increasingly important to them in the next five years.

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Author Jeff Gitterman

Jeff Gitterman is a co-founding partner of Gitterman Wealth Management, LLC, and a thought leader in the field of Sustainable, Impact, and ESG (Environmental, Social, and Governance) Investing. He is the creator of his firm’s SMART (Sustainability Metrics Applied to Risk Tolerance)® Investing Services, which offer investment opportunities for individual clients, as well as research and investing services for other financial professionals in the Sustainable, ESG, and Impact arenas.

Noted as an “ESG expert” by Financial Advisor magazine, Jeff has also been featured in the past in Money Magazine, Barron’s, Morningstar Magazine, The Wall Street Journal, CNN, and Affluent Magazine, among many others.

Jeff deeply believes that the migration of investor capital towards more Sustainable, Impact, and ESG investments is one of, if not the most effective way to help realize the United Nations’ Sustainable Development Goals (SDGs), and he is committed to helping both investors and other financial professionals navigate the rapidly growing Sustainable, Impact, and ESG Investing landscape.

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