Advocates of ESG investing have often referred to research that show that an investor does not have to sacrifice return to have a portfolio that matches their social concerns. However, recent research by Callan shows that many institutional investors would be willing to sacrifice some returns anyway.
Less than half of institutional investors (47%) stated that ESG investing was chosen because of the importance for risk diversity, and even less (44%) mentioned fiduciary responsibility as a primary concern. The results were based on both defined benefit and defined contribution plan sponsors. While the survey focused on the institutional investment community, wealth managers can take note that these investors are likely the most disciplined. Even so, just over a quarter of the responses of participants focused on high returns as a major reason.
While nearly half of the respondents said they have some Socially Responsible Investment requirements in their plans, private plans are behind both public plans and endowments. Endowments are almost twice as likely to incorporate ESG than corporate plans.
A new more left leaning administration could help drive an uptick in demand for ESG investment products on the corporate side. The present Department of Labor warned against any type of plans that are not clearly focused on financial performance as its primary goal, which is a sharp contrast to European policy. Corporate plan administrators might feel more comfortable with a new administration in focusing on ESG, and try and align retirement plans with the values of its employees.
The area where market share has not dramatically increased in recent years is among defined contribution plans with only about a quarter stating there is at least one ESG option in the plan and only 5% in private defined contribution plans. Enthusiasm is not gaining at this stage either, with the Callan survey showing almost no desire to add ESG to corporate plans in the United States. The lack of uptick among defined contribution plans is likely due in part to the amount of lawsuits corporations have had due to 401(k) plans.
However, institutional investors’ increased interest will likely be followed by retail investors’ enthusiasm as younger investors have also shown more interest in their portfolio matching their values. As long as the investments stay within the range of a traditional portfolio, one or two percentage points may not influence an investment strategy.
Wealth managers should be prepared for the topic to come up with a significant number of younger, affluent clients.