There’s an Untapped Market for ESG Investing

Some research may lead plan sponsors and advisers to believe only Millennials and women are most interested in sustainable investing, but research from Morningstar finds most investors, across ages and genders, have clear preferences for environmental, social and governance (ESG) investment products.

Morningstar developed a new tool, called My Sustainability Profile. The tool is designed to reveal a person’s sustainability preferences by asking them to make choices between investment options with carefully constructed trade-offs. Experimental economics uses this trade-off, or revealed preference, approach to help mitigate biases like social desirability and to identify people’s underlying preferences based on the pattern of choices.

Using the My Sustainability Profile to measure the sustainability preference score of a nationally representative sample of 948 respondents, Morningstar found that, overall, 72% of the United States population expressed at least a moderate interest in sustainable investing.

The results indicate that gender isn’t a useful gauge for determining interest in sustainable investing. The research found that while women have a slightly stronger preference for sustainable investing than men—which was mainly driven by more women being especially passionate for sustainable investing—the difference between the weighted averages was small. In addition, this small difference disappeared after controlling for income, age, political ideology, religiosity, risk tolerance, financial literacy, and other sociodemographic variables.

The results also bust the myth that different generations have substantially different preferences for sustainable investing. The average preference score for Millennials and Generation X were statistically equivalent, and while Millennials, on average, showed a slightly stronger preference for sustainable investing when compared to Baby Boomers, the difference didn’t exist after including sociodemographic variables.

Morningstar says there’s an untapped market for sustainable investing that advisers may be able to reach (and retain) by offering sustainable investing options, and if advisers are relying on their clients to broach the topic of sustainable investing first, they may be losing out.

Which is most important, ‘E,’ ‘S,’ or ‘G’?

Although much of the global attention within the ESG sector of investing has been placed on the environmental component, the ESG Investor Sentiment Study from Allianz Life Insurance Company of North America found that in the U.S., social and governance issues are equally important as or more important than environmental record when consumers decide whether or not to invest in or do business with a company. Furthermore, the study found that a company’s ESG profile plays a significant role in its overall reputation as a majority of consumers believe companies focused on ESG issues have better long-term prospects.

When asked about the importance of a variety of ESG topics in making a decision to invest in a company, 73% of American consumers noted environmental concerns like natural resource conservation or a company’s carbon footprint/impact on climate change. However, the same percentage emphasized social issues such as working conditions of employees or racial/gender equality, and 69% highlighted governance topics like transparency of business practices and finances, or level of executive compensation, as being significant in their decision making.

Should ESG investment products be made available to plan participants?

The Allianz study found a significant gap still exists between what people say is important and how they actually invest. More than three-quarters of respondents said the following ESG issues were important in their decision to invest: provides safe working conditions for employees (84%); transparent in their business practices and finances (81%); provides living wages to employees (80%); provides quality health insurance to their employees (78%); and conserves natural resources (76%).

Yet, less than half said they chose to invest/not invest based on those same business practices: provides safe working conditions for employees (42%); transparent in their business practices and finances (44%); provides living wages to employees (40%); provides quality health insurance to their employees (42%); and conserves natural resources (44%).

“Although many people remain skeptical about actual returns from ESG-focused investments and are confused about what qualifies as an ESG investment, investors still see value in supporting businesses with strong ESG practices,” says Kelly LaVigne, vice president of consumer insights for Allianz Life. “As information about the way companies operate becomes more readily available to average investors, we anticipate an even stronger focus on ESG performance. Greater awareness and education on ESG topics will help bridge any existing information gaps on the true importance of ESG.”