Note: This article is courtesy of Iris.xyz
By Marie Dzanis
Until now, much of the growth in environmental, social and governance (ESG) investing has been concentrated among large institutional investors. But the number of financial advisors considering ESG investment products is starting to grow – whether because of idealistic convictions, updated investment guidelines or risk-reduction objectives. The merits of ESG investing have been trumpeted for years. So why have asset flows to date lagged across retail and advisor channels? We believe that a disjointed array of investment approaches and weak risk-adjusted performance versus non-ESG alternatives has inhibited uptake. However, we also believe that the mainstream investor marketplace is eager for ESG products that combine an integrated approach to ESG best practices with enhanced risk-adjusted returns.
TO DATE, DISPARATE APPROACHES, LIMITED APPLICATION
Seven distinct approaches to ESG investing have emerged over time (see Exhibit 1). These approaches did not evolve in linear sequence but, rather, sprang from a mix of top-down
(e.g., boards of directors embracing ESG principles) and bottom-up drivers (e.g., investors demanding ESG accountability from public corporations). Implementation varies from approach to approach, but the resulting approaches typically feature poor diversification and skewed returns that have been difficult to use in standard asset allocation models.