Natixis Global Asset Management’s 2017 ESG Report outlines the rising importance placed on environmental, social and governance (ESG) investing.
Aided by the fact that the Department of Labor (DOL) has made ESG investing within retirement plans more palatable from the plan sponsor fiduciary risk perspective, ESG has become a key driver in getting more investors, across generations, to invest more or even start planning for retirement, according to Natixis researchers.
The Natixis analysis looks across three investor populations, “including institutional decision makers, financial advisers, individual investors and participants in defined contribution plans in the U.S.,” finding each group is enthusiastic about pursuing ESG opportunities.
“Individuals clearly tell us that they want their investments to reflect their personal values. The environmental, social and ethical records of the companies included in their investment portfolios matter to investors,” explains David Goodsell, executive director of the Durable Portfolio Construction Research Center at Natixis Global Asset Management.
Goodsell sees “plenty of potential” to incorporate strategies that consider ESG criteria to incent younger investors to increase their participation in company-sponsored retirement plans. Eighty-four percent of Millennials say they would save more for retirement if their plan offered an ESG option, he notes. “We see a real desire from Millennials to ensure that their money does social good.”
Another positive development is the growing maturity and sophistication of ESG products now offered to investors. The marketplace is not just comprised of products that “screen out sin stocks,” for example companies that sell firearms or tobacco. Rather, ESG investments today encompass a wide variety of deeply researched and nuanced strategies that set portfolio weights according to factors such as resource and waste efficiency, exposure to water scarcity or climate change concerns, etc.
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The Natixis research findings show a large majority of participants feel investing in companies with sound environmental records (70%), companies that are seen as doing social good (71%), and companies making investments that help to fund advancements in healthcare and education (71%) is important. In addition, 78% stress the importance of investing in companies that are “ethically run.”
There is a gap in the sentiment between how men and women perceive ESG and its framework within their portfolios, Goodsell observes. A slightly larger percentage of women (76%) are concerned with ESG factors compared to men (72%). “Investing in ethically run companies is where respondents place the greatest emphasis, with 81% of women saying it is important, 31% of whom say it is very important.”
“Although ESG may not be as familiar to financial advisers as traditional investment strategies, the discipline is gaining more attention within the financial services industry,” Goodsell continues. “Forty percent of advisers globally are already using ESG seeking to mitigate governance and social risks. Additionally, institutions surveyed anticipate a greater role for ESG, with six in 10 predicting that it will become standard practice for their organizations within the next five years.”
Perhaps most important in the context of ERISA retirement plans, which place a strong emphasis on plan fiduciaries considering participant’s economic needs prior to their social or political aspirations, 55% of advisers say there is potentially significant alpha to be found in ESG. At the same time, 57% say ESG can help mitigate headline risks.
The idea is that, as the Natixis research frames it, “the fundamentals of a company are only part of the story. Understanding how the board governs itself, its business, the environment in which it works and its employees live, as well as how it treats people are equally critical to discovering good, long-term investments … There are real world changes, like population growth, urbanization, and resource depletion, that may have an immeasurable effect on equity markets and transform companies as we know them today.”