Sustainable investing has long been considered a mediocre investment strategy because of low returns, but returns are improving and investors are noticing, according to the 2018 Morgan Stanley Institute for Sustainable Investing survey.
Once reserved for specialist firms, sustainable investing has matured and is now widely incorporated into investment processes. The survey found that 75 percent of asset managers say their firms have adopted sustainable investing, up from 65 percent in 2016 and exemplifying just how quickly sustainable investing has grown, especially with younger investors.
“There has been a constant buzz in the investment world about socially responsible investments for a while,” said Mackenzie Richards, senior financial consultant for Bank RI Investment Services in Rhode Island. “Anyone that’s kept their ear to the grindstone has picked up on this. However, in the past couple years it’s become almost difficult to not hear about them as fund companies look to stay ahead of the curve.”
This growth is expected to continue for the next few years as two-thirds of respondents whose firms don’t incorporate sustainable investing strategies say they plan to in the future.
Financial Returns Vs. Impact
SRIs and ESGs often come with the stigma of providing low returns that require a financial tradeoff for those wanting to invest sustainably.
This stigma persists as the survey showed that 76 percent of respondents believe that a perception remains among some investors that sustainable investing requires a financial tradeoff, though, the respondents themselves did not agree.
While “doing good” continues to be the main motivator behind investors choosing sustainable investments, financial returns were just as important as impact (79 percent).
“I think when people first hear about socially responsible investing, they think it’s investing with your heart, but not your head,” Richards said. “However, there’s certainly a case to be made that companies that have a focus on their employees’ well-being will have higher productivity. Additionally, companies that focus on renewable energy should have lower fixed costs over time, which will increase their net profits. This isn’t just investing to feel warm and fuzzy – it’s a way to further diversify your portfolio.”
In fact, proof that investors are no longer having to choose between impact and returns came from asset managers who said that they’ve seen a surge in client inquiries and requests for both sustainable investing products and sustainable investment performance data.
Expanding Investor Choice
More demand for sustainable investments means more demand for sustainable investment strategies from firms. Mark Brinser, a certified financial planner with Stewardship Financial in Lancaster, Pa., said his firm already has several options for SRI investors and is working on incorporating more options in the next few years.
“We currently offer three SRI model portfolio’s for our clients, a moderate-conservative portfolio, a moderate portfolio and a moderate-aggressive portfolio,” Brinser said. “The biggest change we have made to those portfolios over the last 1-2 years is integrating more ETFs into the portfolio and removing some mutual funds. As the list of available SRI/ESG ETFs has grown, these lower cost index options have enabled us to build lower cost portfolios for our clients.”
Firms have embraced sustainable investing strategies, expanding ESG-tailored investment vehicles and investor choice. The list of sustainable investing products offered ranges from mutual funds and ETFs to private equity, venture capital and hedge funds. Sixty-two percent of respondents’ firms offer mutual funds.
The firms surveyed cite capturing new assets, high growth potential and investor expectations as the driver for adopting more sustainable investing practices at their firms.
Additionally, asset managers believe increased stability (51 percent), high client satisfaction (50 percent) and product popularity (44 percent) all helped drive their decision to adopt sustainable investing practices.
Richards said that for him, talking about socially responsible investments has helped him cultivate a deeper relationship with his clients and better understand their values during financial planning. “When these topics are explored, the conversation becomes less superficial and the relationship becomes deeper. This not only helps the client invest in something they are proud to stand behind, but it creates a strong foundation for a long lasting relationship between the client and advisor,” Richards said.
The Future Is Now
The financial services industry anticipates continued growth in sustainable investing and is hedging its bets on its success. Predicting enhanced client sophistication and demand, 89 percent of those surveyed said that their firm will devote more resources to sustainable investing in the next two years.
However, there is one factor that could potential hinder the growth of sustainable investments that firms will have to address if they are going to be successful with sustainable investment practices – data.
Better data on these investments is crucial for further growth, and considering the financial services industry has struggled to keep up with data, tracking and reporting; this presents a particularly challenging hurdle.
As it stands, 70 percent of respondents feel that the industry lacks standard metrics to measure nonfinancial performance of sustainable investments, hindering their ability to quantify impact.
With more firms needing to measure and report on portfolio impacts, asset managers could have difficulty meeting investor demand for the desired information. This also means that a uniform definition of an SRI must be established in order to quantify nonfinancial performance.
“I think that a set of criteria will begin to emerge as companies seek to compare themselves to each other. It will be interesting to see how firms like Morningstar and Reputation Institute adjust their rankings based on which factors emerge as most important to investors,” Richards said.
Still, the prospects are good for investors who want to their investments to matter and for firms that want to set themselves apart.
Brinser said, “The conversation around SRI investing opens up opportunities for us as planners to discuss the things that are important to our clients. This means we can get to know our clients on a deeper level and make sure that we are developing a financial plan for them that incorporates the things that are important to them and their family.”
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.