A recent uptick in capital flowing into environmental, social, and governance (ESG) funds has left some financial advisors hopeful that interest in the approach is rebounding.
“We’ve absolutely seen a meaningful uptick in interest from individual investors recently with respect to ESG and impact,” Matthew Blume said.
Blume is the director of ESG research at Pekin Hardy Strauss in Chicago. He said that in recent months a significant portion of new wealth management clients at his firm have specifically expressed interest in responsible investing.
“This is something that has caught our attention and is very encouraging,” he said.
UBS analysts in a note to clients in late September concluded that asset flows to the sector stabilized during the second quarter, following multiple quarters of redemptions. According to the UBS report, global ESG fund outflows contracted by $25 billion during the period.
While still negative, this level represents an improvement over the prior quarter. Notably, the data shows net inflows for both May and June.
Marginal increases in exchange-traded fund (ETF) shares outstanding offer real-time signals of this trend. At over $13 billion in assets, iShares ESG Aware ETF ESGU is the largest in the sector and a bellwether of investor interest. As of Oct. 11, ESGU had approximately 106 million shares outstanding, an increase of about 1% for the month. This range has remained steady since mid-summer, though it is still almost 18% lower than the same period last year and about 60% below the all-time high in May 2022.
Stemming the tide of outflows
Signs of fresh money flowing into ESG and impact investments are welcome after successive quarters in which the sector has been battered by investor defections.
According to Morningstar, sustainable investment funds realized their first full year of outflows since the data company began tracking the segment. Morningstar data shows nearly 2,500 fewer sustainable funds globally in 2023 than the prior year, with 2024 on track for an even steeper plunge.
In recent years, political backlash against sustainable investing in the U.S. — including activism targeting companies and organizations engaged in values-based investing — has dampened some wealth managers’ enthusiasm for ESG. Anecdotal reports suggest this is especially true among wealthy families operating private companies or charitable foundations.
A recent Harvard Law School article titled “Is 2024 past peak ESG?” summarized the mood.
“With a political bullseye and fickle consumer support for ESG investments and corporate policies, maybe ESG has simply become too costly a strategy to pursue,” stated the article by Anne Tucker and Yusen Xia of Georgia State University and Dana Brakman Reiser of Brooklyn Law School.
Gauging the mood of wealthy investors
A recent survey by PitchBook found that 54% of wealth managers and family offices have incorporated ESG principles into their portfolios, though they expressed mixed expectations about their future commitment to the sector.
The survey also revealed that about 40% of wealth managers and family offices said geopolitical concerns about their allocations had increased. Despite this, more than 40% reported raising their ESG allocations, compared to only 14% who reduced their exposure.
Mali Perl, president of New York based wealth manager Longwave Financial, said volatility in ESG allocations in recent years has come with a silver lining.
“What we saw was that funds offering a purely exclusionary approach or those that were less authentic had significantly more outflows than more intentional funds. We think that’s a healthy indication that people are ‘reading the labels’ on their investments,” Perl said.
However, “reading the labels” is not always easy, complicating accurate data analysis. While the pace of new ESG allocations is improving, measuring this accurately can be difficult. UBS analysts noted that their work has become more challenging as many funds have relabeled themselves as non-ESG or impact funds in recent years.
Regaining trust
But there remains a long way to go before ESG managers win over skeptics. The Pitchbook survey found that over 60% of respondents globally who are not currently investing in ESG believe that the investment category is “mostly baseless virtue signaling.”
Still, many advisors remain optimistic that the setbacks in recent years are just bumps in the road.
“This is a natural progression as ESG transitions from a niche investment concept to becoming more mainstream,” Perl said.
“Just like when buying organic became popular in the 90’s – it was a gradual shift that began with health enthusiasts in local small stores and is now offered at every regional supermarket — mass adoption will not happen in a straight line,” she added.
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