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Advisors that are feeling as though they’re fielding fewer client inquiries regarding environmental, social and governance (ESG) investing than they were just a few years ago probably aren’t off base in that summation.
Specific to the fund industry, over the past couple of years, ESG became a lightening rod of political criticism with congressional and state-level Republicans – right or wrong – asserted ESG amounted to “woke” investing and woke has no place in capital markets. Then there were the concerning allegations of greenwashing – the act of boasting environmental credentials that aren’t really there. The negative headlines have weighed on many actively managed ESG products.
“The anti-greenwashing efforts come at a time that net purchases of sustainable funds have slowed, except for passive funds,” noted Morningstar’s Leslie Norton. “Passive funds have taken the lion’s share of flows. Now, analysts say, some regulators are taking aim at passive sustainable funds, which typically use screens to exclude certain industries, controversial stocks, or companies that fail to pass certain ESG hurdles. Sometimes, these funds fail to police their own investments.”
To be sure, many ESG funds, active and passive, are here to stay and companies are still talking about ESG, but they’re using different vernacular, such as “sustainability.” However, investors of all stripes aren’t as ESG-enthused as they were a few years ago.
An ESG Reckoning?
The recently published 2024 Survey of Investors, Retirement Savings, and ESG by the Hoover Institute and Stanford University highlights waning investor interest in ESG.
“The study found that for the second straight year, support for ESG is down among a wide swath of investors, including institutional investors, shareholders, and retail investors, such as those investing in 401(k)s and other retirement accounts,” according to the study. “There is a particular decline in ESG support among younger investors, who may be the ones most impacted by higher inflation and job market softness and thus less likely to believe they can make sacrifices in their portfolio for ESG aims.”
Advisors shouldn’t ignore these findings, particularly as they pertain to younger investors, because when ESG was hot, conventional wisdom indicated Gen Z and millennials would power this investing style for decades to come. Hoover Institution senior fellow and Stanford Graduate School of Business finance professor Amit Seru mentioned the significant decline in ESG interest among younger investors.
“Two years ago, young investors were twice as likely to say they are very concerned about environmental and social issues as older investors. Today, the differences are only a few percentage points,” Seru said in the report.
Investors Don’t Want to Make Sacrifices
As ESG grew more popular, it was common for fund issuers, index providers and the like to author research confirming that ESG investing doesn’t mean leaving returns on the table. Likewise, critics asserted that any out-performance offered by broad market or large-cap ESG funds was primarily due to overweights to growth sectors such as communication services and technology.
Both items can be true and at various points in recent years, both have proven accurate. All of that is to say more often than not, ESG doesn’t subject investors to noticeably subpar returns and it’s a good thing because a growing number won’t accept lower returns simply in the name of “feeling good.”
“When asked how much of their theoretical retirement portfolio of $100,000 they’d be willing to lose to ensure the companies they’re investing in achieve levels of diversity in their workforces representative of the US population, the number of Millennial and Generation Z respondents who said they wouldn’t sacrifice anything rose from just 12 percent in 2022 to 47 percent this year,” according to the Hoover/Stanford study.
Bottom line: ESG investing isn’t dead and advisors shouldn’t assume that, but they probably can safely dial back ESG pitches to younger clients.
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