Two groups of people – women and Millennials – are responsible for the doubling of ESG assets to $8.1 trillion worldwide since 2014, said panelists at the InvestmentNews Focus on Investing event on Monday.
"Women now control up to 50% of the wealth in the country, and Millennials will be the recipients of that wealth over the next few decades," said Jordan Farris, head of ETF product development at Nuveen Investments. "Those two groups tend to be more interested in ESG strategies: 90% of Millennials and 80% women show an interest in ESG strategies." (ESG stands for environmental, social and governance.)
As interest in ESG grows among women and Millennials, it's growing among advisers, said Stephen Distante, CEO of Vanderbilt Financial Group. "If you're not in the area of impact and interest to them, you're going to lose those assets," he said.
And that interest has been spurred by the advent of new ESG products, such as ETFs, which makes it easier for average investors to participate in socially responsible investing. Even 10 years ago, ESG products were limited to a handful of funds and select high net worth investors. "It was stuck in accredited investor world, where people would have to be accredited – wealthy – to invest this way," said Mr. Distante.
For advisers, the new products mean that it's easier to build a core ESG portfolio, rather than having just a 10% portion devoted to ESG. Morningstar currently lists 39 ETFs with ESG strategies, up from just five at this time in 2014. The largest, iShares MSCI KLD 400 Social ETF, has $951 million in assets. The number of ESG mutual funds has soared to 235 from 164 in 2014. (The number of open-ended ESG funds is somewhat inflated because Morningstar includes some funds, such as Ariel, in the ESG category because they do not invest in tobacco products or similar "sin stocks.")
Can clients create an entire portfolio of ESG investments? Not easily, said Abur Nimeri, senior investment strategist for Northern Trust, but that, too, has changed significantly for the better. When you just screen out companies you don't like – such as oil – you eliminate entire asset classes from a portfolio, making ESG more suitable for clients with more assets and a greater risk tolerance. And there are still relatively few ESG bond funds and ETFs, for example.
Thanks to more available corporate data, ETFs can focus on investing in companies with the best ESG practices in their industries, rather than shunning entire sectors. "We're not looking at excluding industries, but looking at what are best in class from an ESG perspective," Mr. Nimeri said. "Once you do that, you find out that your whole portfolio changes dramatically – and then you find out that on balance, your risk comes down. What the data tells us is that companies with really good ESG practices have a lower risk profile – so now your risk-adjusted return improves. And you'll see total return improve as well."
ESG assets tend to be stickier than other types of investments, Mr. Distante said. "People who invest their money this way usually do it for more than just returns. This type of investment is about stories: What good are you doing in the world with the money you've been fortunate enough to be put in charge of? That's what gives it stickiness and stability."