The capital markets are aptly called as such–the focus being on capital–but capital can manifest itself in other forms aside from money, including social responsibility. Rather than focusing on market value, social responsibility retrains investors minds to focus on just values–things that matter the most to investors rather than profitability and with this rise in social consciousness comes a rise in capital market innovation in the form of socially responsible exchange-traded funds (ETFs).
Although the idea of socially responsible ETFs is not relatively new, it’s still struggling to break into the mainstream, particularly at time when the markets are at fever pitch and the major indexes nearing record highs. Socially responsible investments (SRI) and the focus on environmental, social and governance (ESG) investing has taken a back seat to the profitability-fueled bull market.
However, all is not lost according to Schwab’s ETF Investor Study that extrapolated data from 1,500 ETF investors between the end April and the middle of May. While 13% of the ETF investors were oblivious to the idea of SRI/ESG investing, the majority were aware of the concept–41%.
Changing Face of Investors
As the general populace ages, the changing face of investors begins to unmask itself. An interesting aspect of the study is the increase in ETF investor interest from millennials and Generation X, as well as their increased focus on SRI/ESG. In addition, what the study found is that women have a higher inclination to SRI investing.
“Younger investors flock to ETFs much more than previous generations,” said Kari Droller, vice president of third-party platforms for mutual funds and ETFs at Charles Schwab. “We found the same really holds true for SRI ETFs. Both millennials and Gen X investors are much more likely to be both actively-looking to SRI strategies and taking action on that.”
“When it comes to SRI strategies, women do stand out. We saw women place much more value on SRI strategies,” added Droller.
Barriers to SRI/ESG Adoption
The challenge to bring SRI/ESG investing into wider investor adoption faces various obstacles, according to the study. Investors have cited issues, such as lower performance and a lack of education regarding these products.
“84% of the ETF investors in the study said that they believe that SRI strategies yield lower performance than non-SRI strategies,” said Droller.
“One thing that the industry is somewhat challenged with is to provide very nuanced and personal ESG strategies that can still have broad appeal,” said Matthew Bartolini, Head of SPDR Americas Research at State Street Global Advisors.
Values Over Profits
Another interesting note derived from the study is lesser emphasis on profitability in the retail ETF investor space, specifically by millennials.
“Within the retail community or more millennials, there’s more of an emphasis placed on social and environmental output than the return aspect,” said Bartolini. “The byproduct of that is the ESG/SRI decision-making tends to be very personal.”
While the study did reveal detractors from SRI/ESG investments as a result of lower performance, it all boils down to what these funds are designed to accomplish–aside from pulling in investor capital, they are also designed to pull at the heart strings of these investors and to make social impacts they value the most. The biggest challenge still remains of ensuring that prospective investors are educated and aware of these products in order to obtain the broader appeal it deserves.
“Education is ultimately the most important,” said Bartolini.
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