Investing has increased in popularity over the years; apps and online platforms have even been created to make investing more accessible to the general public. With improved accessibility, there has also been a switch in the way people invest. As seen in a Morgan Stanley survey, “Around 85% of investors are interested in sustainable investing, up from 71% in 2015” (Iacurci, 2020). Since more people are showing an interest in socially responsible investing, the term ESG has risen to popularity. ESG investing stands for environmental, social, and governance investing; it's an investment strategy that is used for both financial returns and social impact.
ESG has proven beneficial for company success. According to a report by Morgan Stanley, “ESG can directly impact a company’s competitive positioning. Therefore, managing the environment's social factors are simply part of sustaining a competitive advantage in today’s economy” (2017). Even if you are not planning on starting a business any time soon, ESG also benefits you as a consumer and employee by bettering the female-to-male ratio in companies, enforcing ethical regulation, and bringing attention to significant issues. These incremental changes craft a better workforce for everyone from teenagers to adults. So why are more people not investing this way? Why is ESG investing not the norm?
One wealth manager we spoke with, addressed the reason for the lack of consistency among all age groups. She stated, “A lot of clients initially want ESG investing but then go back because they worry that they won’t get the same returns.” A recent Morningstar report for the 2019 fiscal year even showed that sustainable mutual and exchange-traded funds only held $137.3 billion in total assets, which is less than 1% of the $20.7 trillion held in the universe of mutual and exchange-traded funds in the U.S. (Hale, 2020). However, a financial consultant from Wintrust Wealth Management said, “There is a need for individuals to be socially aware, social activism is a thing, so it's great people can strengthen that in their financial endeavors.”
Ultimately, while ESG investing may not result in high returns compared to other investment strategies, ESG is crucial in advocating for positive social change, both in and out of the workplace. As you grow as an investor, consider learning more about ESG investing and incorporating it into your long-term investing strategy.