U.S. ESG (environmental, social, governance) funds outperformed conventional funds in 2019 and continued that trend this year, despite the global pandemic, with many ESG stock ETFs beating their broader U.S. and European indexes. Fueled by its risk mitigation and growth potential, analysts say ESG stands to be a key beneficiary as the world economy forges a path to recovery.
In the recent webcast, ESG Outperformance: Anomaly Or Long-Term Trend?, Brian Maute, Divisional Director for DWS, brought together a panel examining why and how to make ESG investing a core portfolio strategy by looking at the various characteristics. There’s also the means of disproving ESG myths of returns being traded off in favor of representation, and how to initiate the ESG conversation with clients, which is important.
The Evolution of ESG – from the Margins to the Mainstream
Speaking first is Mona Naqvi, Senior Director, Head of ESG Product Strategy, North America at S&P Dow Jones Indices. Her first goal is to bust myths in regards to ESG. There are a few Naqvi has in mind.
First, ESG Investing does not equal ethical investing. While there is SRI (socially responsible investment), which is about values-based investing, ESG is the process for incorporating financially-material information, which is sometimes in alignment with one’s values.
Additionally, ESG does not mean sacrificing returns. Resource-efficient companies tend to be more efficient in general. Broad market exposure is now possible with market returns (if not better). Lastly, ESG sheds light on real economic impacts in the portfolio.
To make it clear, with large amounts of growth in population and middle-class numbers in the next couple of decades, the policy commitment is growing. It’s necessary to look at finding the link between ESG and stock performance. As it stands, institutional investors reap the benefits.
Fortunately, as Naqvi points out, the incorporation of ESG has had a positive effect on financial performance. Commitment is widespread, and the demand for ESG funds is growing. The best way to look at this is through S&P DJI ESG Scores, which place a financially material lens on ESG.
Data is cultivated over 20 years of investment experience by RobecoSAM. Data Collection goes beyond public disclosure. So, information is built upon an extremely granular set of data points. There’s also industry-specific use of the scores, accounting for the most financially material issues. That said, ESG scores are based on the most comprehensive & granular ESG metrics available. Daily controversies monitoring keeps the data up-to-date.
Something to keep in mind in regards to ESG is how not all issues matter to all industries, regardless of if they fit into the ESG spectrum. Mining & minerals-based companies have issues different from restaurants, which can be different from pharmaceuticals. That doesn’t make their successes weigh more or less than one another, but it makes sense to track the positive effects that matter for these different types of industries on an individual basis.
ESG funds have been relying on the S&P 500 ESG Index, which initially launched in January 2019. The S&P 500 ESG index helps to measure the impacts. Some of the results are clear. For example, there has been 7% more female representation in all management positions, 7% more exposure to companies with diversity policies regarding board nominations, and 9% exposure to companies with greenhouse gas emission reduction targets.
Looking at these results, Naqvi explains how sustainable performance with these benchmark-like returns can easily dispel the myths of any trade-off occurring.
Wealth Transfer Opportunities
Speaking next is John P. Cianciulli, President of Team Edge Consulting, who has advice and knowledge to share in regards to wealth transfer opportunities. Cianciulli likes to frame this area around financial advisor challenges, and the importance that plays into newer generations taking control and playing just as big a role as the investors of a certain grouping in the past.
In what’s referred to as the Great Wealth Transfer, referring to the aging boomer population passing down of wealth to millennial children and heirs, there’s an estimated $16 trillion to be transferred over the next 30 years. This is following something of a traditional pattern where the boomer’s parents pass it down to their children, who then pass the wealth to spouses and children going from there.
The key questions to ask here are, “Where are relationships?” “Which segments do you understand?” and “What is the process for full connectivity?” However, as Cianciulli explains, the critical element is looking at how women and the next generation of clients will have different preferences and buying patterns than the “traditional” group, which is mostly men from a different era.
This is why it is important to understand the next-gen market, who will want to be able to perform through digital access, have diverse portfolios that can focus on real estate and global investments, in addition to paying attention to the social impact of their investments. Fortunately, this is where ESG comes in as a connector.
62% of millennials believe investments are a way to express ESG concerns. ESG investing especially appeals to women, younger, and higher-income surveyed investors seeking alignment between values and lives. Currently, clients are looking for advisors to provide comprehensive multi-generation wealth management advice, which will ideally contend with this continued shift.
This is where it is essential to look at the notion of discovery. Seeking out how the financial groups connect to the non-financials, which, in turn, connect to the next generation. Asking the right people at the right time is of huge importance.
Before wrapping up, Maute steps back in to bring up the important question – What is the positive impact? This is, of course, to get rid of controversial activities, work on climate change action, etc. So far, the results have delivered help with sustainable development goals, renewable energy, and board diversity.
Financial advisors who are interested in learning more about ESG performance can watch this previously recorded webcast now.