In this week’s blog CCM uncovers four common misperceptions of Impact and ESG investing.
- Myth: Impact and ESG investing sacrifices financial performance.
Truth: Strategies that incorporate impact and ESG components have track records, and it is imperative to review their historical risk-adjusted financial performance against their respective benchmarks, as is the case for any investment — impact or not. In many cases, impact and ESG strategies require additional research and analysis, which may reduce overall risk. Historical data additionally dispels this myth — sustainable equity funds finished 2020 with a clear performance advantage relative to traditional equity funds, according to Morningstar.1 And sustainable funds comfortably outperformed their peers in 2019. The returns of 35% of sustainable funds placed in the top quartile of their respective categories, and nearly two-thirds finished in the top two quartiles.2
- Myth: Sustainable investing is still too new of a concept and has not been proven.
Truth: While impact and ESG investing is still an evolving practice, some strategies have been around for decades. The U.S. SIF Foundation’s Biennial “Trends Report” — first published in 1995 and now in its 13th edition — is one of the most comprehensive studies of sustainable and impact investing in the U.S. The report provides data on U.S. asset management firms and institutional asset owners using sustainable investment strategies and examines the ESG issues they consider in managing their portfolios. From the first report when assets totaled just $639 billion to today, the sustainable investing industry has grown more than 25-fold, a compound annual growth rate of 14%.3 Hundreds of registered investment companies, which consist of mutual funds, variable annuity funds, ETFs, and closed-end funds, consider ESG criteria in making investment decisions. Additionally, the U.S. SIF Foundation identified 836 registered investment companies with ESG assets in 2020, including 718 mutual funds and 94 ETFs. In 2020, the ESG assets managed by registered investment companies totaled $3.10 trillion, up 19% from $2.61 trillion in 2018.4
- Myth: The impact of ESG cannot be measured.
Truth: Although there is not one standardized measurement tool, many strategies incorporate impact data into their analysis and must quantify and be able to report on the impact outcomes of their investments. According to the Global Impact Investing Network (GIIN), in the first edition of their Annual Survey, 85% of respondents used their own proprietary impact measurement and management (IMM) systems. One decade later, 89% use external systems, tools, and frameworks for IMM. The most used IMM resources are the SDGs (73%), the IRIS Catalog of Metrics (46%), IRIS+ Core Metrics Sets (36%), and the Impact Management Project’s five dimensions of impact convention (32%).5 For funds, the Morningstar Sustainability Rating™ allows investors to understand how the companies in their portfolios are managing their ESG risks relative to their peers. This rating is built to enable advisers and investors to directly compare companies across industries, and a refined design aims to make it easier to use as they make investment decisions.6 Other platforms, databases, and ratings designed to help evaluate impact investments include ImpactAssets, Aeris, and GIIRS.
- Myth: Impact investing is only for millennials.
Truth: Although it is true that younger generations focus on this type of investing, statistics show that people of all ages are interested in impact and ESG investing. In fact, research suggests that a high percentage of women are drawn to investments with environmental and social impacts. Morgan Stanley found that 84% of women versus 67% of men indicated an interest in sustainable investing.7 Those views are particularly relevant in light of how much wealth is in the hands of women: in the U.S., women control almost half of estates valued over $5 million and are predicted to inherit around 70% of the $41 trillion to be transferred over the next 40 years.8 In just two short years, women are projected to control two-thirds of private wealth in the U.S. Last year, roughly a quarter of new domestic billionaires were women. On average, women live four to seven years longer than men, and studies show that 70% of new widows fire their financial advisers. For advisers, introducing and discussing impact and ESG investing with women can be a major differentiator.