Clients who want to put their money into so-called ESG investments might have plenty of things on their mind other than making a profit — fighting climate change, say, or promoting fair labor practices abroad.
But that doesn't mean the most devoted to the cause don't also care about the bottom line, suggests a new
Looking at roughly 20,000 online surveys collected from customers of wealth management giant Vanguard Group, the authors found that investors generally expect slightly lower returns from portfolios dedicated to supporting environmental, social and governance causes. But among investors who have set aside the largest amounts of money for ESG, there were strong expectations that their portfolios would outperform the general market. That was true even if they cited ethical concerns as their primary motivator.
"This finding suggests that traditional investment motives remain an important driver of portfolio allocation even among respondents who believe that there are important non-pecuniary reasons for investing in assets with good ESG properties," according to the paper, which was written by academics at Yale, Stanford and other universities with the help of a Vanguard researcher.
Do-good investing under fire
The general idea behind ESG is to give investors a means of directing their money toward companies whose business models align with their own ethical preferences and personal causes. People who are worried about climate change can put their money into funds that, hypothetically at least, invest in green-energy firms and avoid carbon-spewing fossil fuel companies. Investors unnerved by child-labor practices in certain countries can place their dollars in companies that don't do business in those places.
US SIF, a nonprofit group promoting "sustainable and responsible" development, reported in early 2022 that the U.S. had
Though around for decades, ESG has turned into a political hot potato in recent years. In March, Republicans in Congress passed a bill that would have overturned a
Some of the controversy centers on questions of whether ESG investors are being misled into believing they can achieve just as great returns supporting their favorite causes as they would following a more traditional investment strategy. Myriad studies of ESG funds' returns have shown
Low uptake by retail investors
The National Bureau of Economic Research's paper suggests that ESG strategies are still embraced by only a minority of investors. It reported that only 3.5% of the people polled by Vanguard said they had money in ESG funds.
The respondents generally expected returns from ESG strategies to be lower. They predicted their gains from ESG investing would fall behind those of the general stock market by an average 1.4% over the course of 10 years.
The survey also asked the respondents what they thought the best reasons for ESG strategies were, regardless of whether they had embraced one or not. Only 7% said their primary motivation would be returns. Roughly 25% said they would be driven by ethical considerations, and 22% said they would want to invest their money in companies whose business models would be resilient to climate change — giving them a hedge against risk from more exposed firms. The remaining 45% said they could see no reason to invest in ESG.
But among actual ESG investors, the study found that respondents who cited ethical considerations as their primary concern were more likely than others to make an ESG investment even if they thought the payoff would be lower than average.
"This suggests that the ethical motivations might induce a willingness to give up financial returns," according to the paper. "However, even among these investors, we find a positive relation between ESG holdings and expected excess ESG returns, with a much larger share held by investors who expect ESG to outperform the market compared to those who expect underperformance."
Recent interest
That more or less tracks with what Mitchell Kraus, a wealth manager at Capital Intelligence Associates in Santa Monica, California, sees with his own clients. Kraus said he was almost never asked about ESG — or socially responsible investing, as it used to be known — during his first 20 years in the industry. Only in the last 10 has he started regularly fielding questions about it.
"Often, people will say, 'You know, I've never expressed interest in this before, but now that I hear you talk about it, I am interested at some level," Kraus said.
Of course, just as opinions on ESG vary widely throughout the U.S., so do they among Kraus's clients. Kraus said one woman called him to say, "I hope you haven't put my money into any of those (expletive) ESG funds." He explained he would never put clients into an investing strategy he didn't believe suited their wishes.
Jamie Ebersole, the founder of Ebersole Financial in Wellesley Hills, Massachusetts, estimated fewer than 10% of his clients come to him with questions about ESG investing. The vast majority are more interested in finding ways to hedge against volatility in the stock and bond markets and improve their portfolio performance.
Even though Ebersole will bring up ESG with most clients, few have strong convictions about it. Of those who come to him specifically seeking it, he said, the biggest concern tends to be climate change.
"Next come other areas such as strong corporate governance, boardroom diversity and environmental pollution," Ebersole said.
Kraus said he's careful to not overpromise the likely returns of ESG investing while also not downplaying the advantages. When he started as a wealth manager in the 90s, he said, it was almost impossible to beat the market using a strategy that avoided investing in tobacco companies. Now there are more opportunities for people who, say, want to avoid putting their money into for-profit prisons.
But as is true with any investing strategy, it's virtually impossible to predict what combination of factors will cause a particular ESG investment to be up one year and perhaps down the next.
"I think, 90% of the time, it either helps or doesn't hurt," Kraus said. "At the same time, when you restrict investing in a way that doesn't take in the market as a whole, you are inevitably taking on different types of risk."
The National Bureau of Economic Research's paper compiled its results from online surveys that asked three questions of Vanguard clients, 80% of whom were retail investing accounts and 20% were holders of retirement plans. The first asked them to estimate the returns from an ESG portfolio over the course of 10 years. The second asked them to choose the best reason for adopting an ESG strategy, allowing for these answers: no reason, excess financial returns, non-pecuniary ethical considerations and hedging against climate change. The third question attempted to gauge how concerned they were about climate change.
The answers were compiled from a series of 10 polls conducted between June 2021 and December 2022. Each survey elicited roughly 2,000 responses.
