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Sustainability Matters

Yes, Sustainability Is Important to Investors

Returns-minded investors also think companies with good sustainability strategies make good investments.

This headline from investment trade publication Ignites caught my eye this week: “ESG ‘not a priority’ for majority of UK retail investors.” It was referring to a Charles Schwab UK online survey of 1,000 individual investors in the United Kingdom. In it, two thirds of respondents said that their investment priority is maximizing returns, not sustainability. That may have been the finding that Schwab and headline writers wanted to emphasize. But it doesn’t seem to reflect what the exact same investors on the survey actually think about sustainable investing.

It turns out that 71% of the survey’s respondents also think companies with good sustainability strategies make good investments, and that 44% say they consider environmental, or social, and governance factors when making a new investment. That number is considerably higher for millennial and Generation Z investors, with 55% of the former and 56% of the latter saying they regularly consider ESG factors. Baby boomers were not as interested, with only 28% saying they regularly consider ESG.

So the bottom line for me on this survey is that a big majority of investors think sustainable companies make good investments and about half say they consider ESG in their investment decisions. And among younger investors, more than half do so. Millennials, in particular, are entering their prime investing/wealth accumulation years.

How does this square with the survey’s headline assertion? It’s not surprising that most investors’ top priority in purchasing an investment product is to maximize their returns. Of course it is—that’s the purpose of making an investment. For an individual investor, purchasing an investment product is not so different from other consumer product purchases. We buy things because we need them (or are persuaded that we need them). And in the process of selecting from a range of choices for a given type of product, many more of us now consider a product’s sustainability features. Older people don’t do it as often because their consumer and investment decision-making habits developed at a time when sustainability was much less salient.

The Schwab UK survey prompted me to look for similar evidence on what individual investors in the United States think about sustainable investing. It turns out the venerable Gallup polling organization released findings in February from an online poll of investors with at least $10,000 invested in stocks, bonds, or funds.

The views of American investors on sustainable investing track with those of British investors. About half of U.S. respondents—48%—expressed interest in sustainable investing, though only about 25% said they had heard “a lot” or “a fair amount” about it. When asked about their investment priorities, about three fourths said risk and return. When it comes to ESG issues, though, between 35% and 41% said they “think about or research” ESG factors in making investment decisions.

So it’s the same basic story in the U.S. Investors prioritize investment performance more than ESG factors, which is to be expected given that the whole point of buying an investment product is for it to deliver competitive returns. But many investors are interested in investment products with sustainability features.

In both markets, there is a lot of room for sustainable investing to grow among individual investors. In this respect, sustainable investment products face a similar challenge as other sustainable consumer products: getting people to act on their sustainability preferences.

Gallup noted that more investors were likely to do so if their defined-contribution retirement plans offered sustainable funds. Seven in 10 respondents said they would “definitely” or “probably” invest in sustainable funds if offered in their 401(k) plan. Gallup also noted that investors aren’t hearing much about sustainable investing from financial advisors.

Offering ESG choices in 401(k) plans and hearing more from advisors would help investors act on their sustainability preferences. But I think the authenticity of advisors and asset managers is really the key factor. It’s not easy for investors or consumers to evaluate a product’s sustainability claims. That’s why sustainable funds need to be much more transparent about the specific sustainable investment approach or combination of approaches they employ. Rather than simply list their holdings, they need to provide the ESG or sustainability thesis for their holdings. Few funds are doing these things.

Sustainable funds should also lean into their active engagement and proxy-voting activities, which resonate with investors. They are the best proof-point of all for the authenticity of a fund’s and its asset manager’s commitment to generating positive ESG outcomes.