Who cares about ESG investing? Almost everybody

I spend the first three days of this week at the CFA Institute Annual Conference where sustainable investing and ways to help investors make better decisions is an important part of the programme. I have written about the differences in attitude towards ESG investing and sustainable investing in the US and Europe before, with professional investors more likely to consider ESG investing a fad. But no matter if ESG investing is a fad or a true, there is at least one thing asset managers and wealth managers can be assured of: the majority of investors will consider sustainability factors in their investment decisions when given the choice.

Most studies about sustainable investing ask investors how important they think sustainability criteria are for their investment decision. However, answering these questions on an abstract scale is usually not representative of the true actions of investors when it comes to investing money as I have shown in the case of risk profiling questionnaires. In this respect, a recent study by our colleagues at Morningstar in the US is a real step forward because they confronted 158 retail investors in the US with a series of choices between two stocks. For each stock, they provided information about past returns and the sustainability of the company before asking them to allocate $1,000 amongst the two stocks. If investors care more about sustainability criteria in their investments, they should allocate more money to the sustainable stocks.

The main result of the study is shown in the chart below and it is rather unequivocal. 72% of Americans gave at least equal weight to sustainability criteria than to traditional performance criteria in their investment decisions and 44% of investors put a higher weight on sustainability criteria than on performance criteria. This is a remarkable finding and shows that talking to clients about sustainable investing is a great way to engage with clients reduce the performance pressure on the adviser at the same time. As we will see tomorrow, another study also showed that sustainable investments can in fact enhance performance, but not in the way that most advisers think.

Importance of sustainability criteria in the investment decisions of US retail investors

Source: Morningstar