Emotions Drive ESG Investors

Environmental, social and governance investing is an investment strategy used by socially conscious investors to decide what companies they want to invest in or do business with.

ESG investment strategies are on the rise, the Allianz ESG Investor Sentiment Study found, and the return on investment isn’t the only reason these in-demand investments are making waves with investors - it’s the emotional payoff.

What Issues Make Up ESGs?

Environmental

• Natural resource conservation.
• Sustainable initiatives.
• Opposition to deforestation.
• Carbon footprint/impact on climate change.
• Proper waste disposal/recycling efforts.
• Investments in renewable energy.

Social

• Animal welfare.
• Safe working conditions for employees.
• Improved access to education.
• Racial, gender and LGBTQ equality issues.
• Charitable contributions/donations.
• Involvement in reducing poverty.
• Health insurance offered to employees.
• Impact of product/service on people’s well-being.

Governance

• Transparency in business practices.
• Level of executive compensation.
• Donations to PACs/political candidates.
• Wages provided to their employees.
• If/how stock holders may vote on issues.
• Number of women and minorities on board of directors.

For Your Consideration

According to the study, 34% said a company’s stance on social issues was the single most important factor to consider when deciding to do business with a company (purchase goods or services). Twenty-seven percent of respondents said corporate governance issues were the most important and 22% said a company’s record on environmental issues was the most important factor.

When it came to the importance of the same issues when making a decision to invest in a company, environmental and social issues tied for the top at 73% each. Another 69% placed governance topics such as transparency of business practices and finances as their top concern when deciding to invest in a company.

The study revealed that investors are more likely to reward companies for good behavior, rather than punish them for issues where they do not align with their beliefs.

All Talk

Allianz also found that there’s a significant gap between what people say is important versus how they actually invest.

Of those surveyed, 76% said that conservation of natural resources was an important factor in their decision to invest in a particular company. However, only 44% based their investment decisionon the issue.

Mitchell Kraus, a financial planner from Santa Monica, Calif., believes the effort it takes to find investments that mirror the investor’s values could explain why so few investors actually invest based on values. But, Kraus also believes that advisors can be the solution.

“The hardest part for a financial advisor is to ask the right questions of their clients. They need to understand more than their financial goals,” Kraus said. “It is tough work doing this and then it can be nearly as difficult finding investments that match those values, but they are out there.”

Feel Good Investing      

The main reason investors cited for getting onboard with ESG investment strategies was to support companies that support the same causes as them (56%). Fifty-one percent of respondents said ESG investing made them feel they were using their money for good and 31% said that the strategy adds necessary diversification to their portfolio.

Kraus said giving clients the ability to support causes close to their hearts can be rewarding for investors.

“Many clients care deeply about some issue and want to vote with their dollars. They want to support companies that agree with them on certain values," he said. “For these investors, the emotions are a key part of their decision to use ESG investment strategies.”

Whatever the reason behind each individual investor's desire to participate in ESG investing, it’s a good opportunity for advisors and planners to show their clients some new investment options and make their clients feel good about their choices along the way.

Todd Hedtke, chief investment officer for Allianz Investment management said, “From a business perspective, companies need to pay attention to the fact that ESG is not some passing fad. Companies that view this as an opportunity to make changes are likely to realize a positive impact in both the near- and long-term.”

AdvisorNews Managing Editor Cassie Miller may be reached at cassie.miller@Adnewsfeedback.com. Cassie has an extensive background in magazine writing, editing and design. Follow her on Twitter @ANCassieM.

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