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May 31, 2022

A false belief that ESG investments yield lesser returns constitutes key deterrent

By Heike Van Den Hoevel

Demand for ESG investments has skyrocketed in recent years. However, there remains a pocket of investors who believe sustainable investments require a return sacrifice. Addressing this persistent notion will be key to further drive uptake of ESG products and tools.

Growing awareness of social responsibility and sustainability have driven demand for ESG investments across the world. According to Morningstar data, global sustainable fund assets have almost tripled in the past three years, reaching $2.77 trillion at the end of the first quarter of 2022.

However, despite evidence to the contrary, there remains a belief that there is a financial trade-off. A Morgan Stanley survey found that 83% of millennials believe that sustainable investments yield lower returns.

When asked to choose between ethical, environmental, or social considerations and the highest return possible, 54% of consumers globally opt for the latter, according to our 2022 Financial Services Consumer Survey. With 57%, this proportion is even higher among the investor segment, and astoundingly it rises with affluence. 51% of those with assets of less than $25,000 chose returns over sustainability, with the figure increasing to 58% among the mass affluent. This means a misconception is preventing uptake of ESG products among two attractive client segments – the affluent and millennials.

Between 2017 and 2021, 88 of the 110 Morningstar ESG indexes with five-year histories outperformed their non-ESG equivalents. Also, the S&P 500 ESG gained 32% in 2021, beating the S&P 500’s 27%.

Of course, performance varies, but we expect ESG investments to become more competitive. Companies are increasingly moving away from unsustainable investment practices – be it for cost reasons or community pressure. At the same time, lenders are distancing themselves from coal-based fuel, unethical work practices or supply chains, and other unsustainable business models, meaning access to funding will be harder to come by and more costly for those that do not, ultimately affecting profits and thus returns.

Admittedly, we are entering a new economic cycle of lower growth amid higher inflation, meaning returns are harder to come by. However, ESG investments have also held up more robustly in times of downturns. In the five years to 2021, 97 of the 110 Morningstar ESG indexes with five-year histories lost less than their broad market equivalents during down markets as measured by the downside capture ratio.

This provides wealth managers with an excellent investment case. However, any sales pitch needs to be accompanied by a sound and clear education campaign with a focus on ROI. ESG may be in all the news headings, but that does not mean investors truly understand the concept nor value the role it can play in achieving returns.

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