DB Plans, Retail Investors Expected to Embrace ESG

Cerulli even expects environmental, social and governance investing to become "the baseline of how portfolios are constructed."

Plan sponsors may want to consider offering environmental, social and governance (ESG) investments in their lineup, and growing investor demand has prompted more than one-third, 35%, of asset managers to make the introduction of ESG investing a high priority, and another 57% say they are placing a moderate level of priority on the task.

Together, this makes for a full 92% of asset managers on the path to or considering offering ESG investing options, according to the December issue of The Cerulli Edge – U.S. Edition.

Asset managers are making these moves because they believe the demand for ESG investing will expand beyond institutional investors, particularly religious-affiliated institutions and  nonprofits, to also include more retail investors. Cerulli also expects other institutional investors to embrace ESG investing, including defined benefit plans, endowments, foundations and health care institutions.

“Investors’ interest is beginning to shift from simply excluding ‘sin’ stocks to seeking investment strategies that incorporate ESG criteria through integration, best-in-class/positive screening, or impact investing, among other methods,” says Brendan Powers, senior analyst at Cerulli. “As ESG strategies are gaining traction in the institutional space, consultants are recognizing this burgeoning demand. Adoption of ESG strategies has largely been concentrated among institutional asset owners, but retail ldemand is expected to grow as next-generation investors seek to align their portfolios with their personal values.”

Some asset managers are integrating ESG screens into all of their products, while others simply make ESG analysts available to portfolio managers, according to Cerulli.

Among advisers, multi-family offices are leading the movement toward ESG investing, with 33% making use of this type of investing and planning to increase their allocations. Another 17% plan to start using ESG in the next 12 months. Another potential catalyst, Cerulli says, is Millennial high-net-worth investors. However, many advisers need to be educated about ESG, as many think it necessarily has a negative impact on performance.

Cerulli also learned that many broker/dealer home offices are ramping up their ESG capabilities on their platforms due to demand from younger investors. “With the increased availability of data from providers such as MSCI, Bloomberg, Morningstar/Sustainalytics and the Sustainable Accounting Standards Board, among numerous others, managers believe that ESG integration will be the baseline of how portfolios are constructed going forward.”

ESG’s predecessor, socially responsible investing (SRI), began as early as the 1960s, when investors became aware of civil rights, labor issues, anti-war sentiment, risks to the environment and equality for women, Cerulli says. Today, ESG investing has expanded to include concerns about global violence, terrorism, climate change and reliance on fossil fuels. There is also greater awareness of social inequality and discrimination.