Investors are enamored of ESGs — values-based investments in companies that are supposedly engaging in positive environmental, social and governance practices. At least that’s what a stream of reports and surveys seems to indicate.
Gartner, a technology research and consulting firm based in Stamford, Connecticut, reported earlier this year that
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The money is flowing, too.
Those fund flows seem to prove that investors really do care how much good a company is doing. Researchers from the University of Iowa, the University of Virginia and the University of Colorado at Boulder, however, aren’t so sure.
“(Investors) want to seem like they’re doing the right thing. They’ll say, ‘Listen, I’ll take the ESG investment because like everyone here, I’m socially conscious.’ But when you look at the actual portfolio decisions as we did with Robinhood, you just don’t see it,” said Jim Naughton, associate professor of business administration at Virginia.
Naughton and his co-authors
Instead, they found there is “less portfolio reallocation and lower growth in investors in response to ESG press releases when compared to non-ESG press releases,” according to the findings. “In contrast, these same investors make economically meaningful changes to their portfolios in response to press releases that do not pertain to ESG, especially those that are earnings announcements.”
Naughton said the fact that Robinhood traders are more active around earnings reports suggests that the major driver of decisions is still the expected return.
“When people in private are making their trading decisions, they do what will make them the most money,” Naughton said.
Advisors, too, hear that clients are interested in ESG investments, but there are still many questions swirling around about how good some of the investments really are for the environment or society.
“I have noticed an uptick in client interest on ESG investing. Sometimes, they don't even know it's possible, but when you bring it up, their face lights up,” said Alvin Carlos, a financial planner and managing partner at District Capital Management in Washington, D.C. “The bigger question is, how robust are the ESG funds out there? A Vanguard ESG fund eliminates ‘sin’ companies, but Facebook is still in the top 10 holdings. One can argue Facebook's products are bad for our society.”
Pamela Chen, chief investment officer of Refresh Investments in Santa Monica, California, asks all her clients about ESGs.
“Overall, the response is ‘yes, very interested — all else being equal,” she said. “Most clients are not willing to give up better returns for ESG. Luckily, ESG performance is improving, so we are moving toward a win-win situation.”
Kade Hammes, owner and financial planner at Storybook Financial in Coralville, Iowa, compared ESG to new technology. It’s neat to look at, but investors want to know that they’re buying an iPhone and not Google Glass.
“I work mostly with millennials that think ESG investing sounds nice, but don’t necessarily care enough to modify their investment approach, especially if it has potential to hurt performance,” Hammes said. “My opinion is that the story of ESG investing isn’t finished yet. The more it gets talked about, the more average investors will be interested in hearing more.”
That’s Naughton’s prediction as well. He thinks people say they love ESG because they really want to. It’s just not enough to truly tip the scales when making investment decisions yet.
“I personally would be happy to invest in a company that doesn’t do it for the money but has an impact on society. We all want ESG to succeed,” Naughton said. “This is not an indication that it will never be the case that it matters, but it isn’t right now.”
