The Resurgence of ESG Investing: A Beacon of Hope for Financial Advisors
In recent months, a notable resurgence in capital flowing into environmental, social, and governance (ESG) funds has sparked renewed optimism among financial advisors. This uptick suggests that interest in responsible investing may be rebounding after a challenging period marked by significant outflows and skepticism.
A Shift in Investor Sentiment
Matthew Blume, the director of ESG research at Pekin Hardy Strauss in Chicago, has observed a marked increase in interest from individual investors regarding ESG and impact investing. “We’ve absolutely seen a meaningful uptick in interest from individual investors recently,” Blume stated, highlighting that a significant portion of new wealth management clients at his firm have expressed a desire to engage in responsible investing. This shift in sentiment is particularly encouraging for advisors who have witnessed the sector’s struggles in recent years.
UBS analysts echoed this sentiment in a note to clients in late September, revealing that asset flows to ESG funds stabilized during the second quarter of 2023. After several quarters of redemptions, the report indicated that global ESG fund outflows contracted by $25 billion during this period. Notably, there were net inflows for both May and June, signaling a potential turning point for the sector.
Indicators of Renewed Interest
Real-time indicators, such as marginal increases in exchange-traded fund (ETF) shares outstanding, further support the notion of a resurgence in ESG investing. The iShares ESG Aware ETF (ESGU), the largest in the sector with over $13 billion in assets, serves as a bellwether for investor interest. As of October 11, ESGU had approximately 106 million shares outstanding, reflecting a 1% increase for the month. While this figure remains nearly 18% lower than the same period last year and about 60% below its all-time high in May 2022, the stability since mid-summer is a positive sign for the sector.
Stemming the Tide of Outflows
The signs of fresh capital flowing into ESG and impact investments are particularly welcome after a series of quarters in which the sector faced significant challenges. According to Morningstar, sustainable investment funds experienced their first full year of outflows since the data company began tracking the segment. The data revealed nearly 2,500 fewer sustainable funds globally in 2023 compared to the previous year, with projections indicating an even steeper decline in 2024.
Political backlash against sustainable investing in the U.S. has contributed to this downturn, with activism targeting companies engaged in values-based investing dampening enthusiasm among wealth managers. A recent article from Harvard Law School summarized the mood, questioning whether ESG has become too costly a strategy to pursue amid political scrutiny and fluctuating consumer support.
Gauging the Mood of Wealthy Investors
Despite the challenges, a recent survey by PitchBook found that 54% of wealth managers and family offices have incorporated ESG principles into their portfolios. However, the survey also revealed mixed expectations about future commitments to the sector. Approximately 40% of respondents expressed increased geopolitical concerns regarding their allocations, yet more than 40% reported raising their ESG allocations, compared to only 14% who reduced their exposure.
Mali Perl, president of Longwave Financial, noted that the volatility in ESG allocations has revealed a silver lining. “Funds offering a purely exclusionary approach or those that were less authentic had significantly more outflows than more intentional funds,” Perl explained. This trend suggests that investors are becoming more discerning and are “reading the labels” on their investments.
The Challenge of Measuring ESG Investments
However, accurately measuring the pace of new ESG allocations remains a challenge. UBS analysts have noted that many funds have relabeled themselves as non-ESG or impact funds in recent years, complicating data analysis. This trend underscores the need for clarity and transparency in the ESG investment landscape.
Regaining Trust Among Skeptics
Despite the positive signs, there is still a long road ahead for ESG managers to win over skeptics. The PitchBook survey revealed that over 60% of respondents globally who are not currently investing in ESG believe that the investment category is “mostly baseless virtue signaling.” This skepticism highlights the need for ESG proponents to demonstrate the tangible benefits and impact of responsible investing.
Nevertheless, many advisors remain optimistic that recent setbacks are merely bumps in the road. Perl likened the evolution of ESG investing to the gradual acceptance of organic products in the 1990s. “Mass adoption will not happen in a straight line,” she noted, suggesting that as ESG transitions from a niche investment concept to a more mainstream approach, its acceptance will continue to grow.
Conclusion
The recent uptick in capital flowing into ESG funds offers a glimmer of hope for financial advisors and investors alike. While challenges remain, the increasing interest in responsible investing signals a potential turning point for the sector. As investors become more discerning and demand greater transparency, the future of ESG investing may be brighter than it has been in recent years. With continued commitment and innovation, the ESG landscape could evolve into a robust and integral part of the investment world, benefiting both investors and society at large.