We’ve persevered through several economic and social curveballs in the past few years and we continually see the investment landscape changing. Today, we can align our values and interests with our portfolio by focusing on environmental, social ESG investing and corporate governance (ESG) investing.
ESG investing is all about investing in funds that support sustainable resource use, equity and ethics and is a type of investing that more and more investors are leaning into. Sustainable funds saw a record inflow in 2021, accounting for $69.2 billion in net inflows, according to Morningstar‡ — a 35% increase over 2020. For those interested in exploring more about this growing investment segment, we’ve pulled together some of our top articles on the topic into a comprehensive guide.
ESG portfolios can provide investors a way to align their social and ethical values with their investment practices. Increasing demand has helped this investment arena grow significantly in the last few years, with more growth expected. Start with exploring the different areas – environmental, social and governance – and dig deeper into the common myths you may have heard regarding performance, scope and costs. These investments are managed with the same rigor as the rest of your portfolio, which means regular evaluation of the fund holdings, including the underlying funds, from both a risk perspective and an ESG screen to ensure these practices are being followed as time goes on.
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ESG investing is not a new phenomenon, although it has evolved over the years to include more data, analysis and opportunity to supports its value. The majority of studies on ESG investing find that the approach provides a net gain. In addition, 90% of studies find a “non-negative relationship,” meaning 90% of studies say you lose nothing by taking an ESG approach to investing. Today, investors have grown to better understand the value of ESG investing and appreciate the opportunity it provides to align personal values with financial success.
Research has shown millennials in particular are drawn to this type of investing. As those individuals start occupying an increasing proportion of the investor pool, it seems likely that ESG investing is poised to continue growing in popularity. Additionally, more data about ESG investments delivering positive returns will likely continue attracting attention to, and interest in, the approach.
Trends and outlook
We’ve seen an increase in awareness and interest grow beyond simply investing to having a real impact on corporate initiatives and strategies. One major trend we’ve seen is the millennial focus on ESG metrics, like sustainability, working conditions, equality and community involvement. Financial institutions and investment professionals will need to prepare for continued interest in and high expectations for ESG investing. ESG is no longer a stand-alone tactic, but rather a holistic investment approach. The shift takes ESG investing from a nice-to-have secondary thought to a top-level expectation—screening assets, funds and companies with an ESG lens, and then making selections from the options that remain and we can expect this pool to continue to grow.
A values approach to investing has existed for decades, but it has evolved dramatically. ESG investing allows investors to customize their approach by excluding and/or including funds based on their personal values. As you start to build your portfolio, first consider working with an ESG advisor. The basics are simple, but the implementation can be complex, because ESG investing can look however you want. Experience and understanding in this type of investing approach and finding an ESG advisor who is knowledgeable in the space will help you decide what’s best for you.
Secondly, ask about approach, including how they identify ESG funds and get in the details of their review process. Also, request the research. Advisors should be able to provide reporting to not only see how your portfolio is performing, but also to see how it’s positively affecting the areas you’ve targeted. Once all your questions are answered, put your money to work and know that you are making a difference.
UMB has provided faith-based socially responsible investing for our clients for more than 20 years. So, a values approach to investing is not new—but it has evolved. The team at UMB pays special attention to industry trends, including the upcoming large wealth transfer to women and millennials—two groups that are very interested in ESG investing. UMB has focused on making sure that we provide relevant and meaningful products and services to our clients, and ESG investing is an investment option worth more research. This included constructing a full suite of ESG portfolios that span across risk tolerances and asset classes.
ESG continues to expand as it enters its renaissance – not despite the pandemic or recent social shifts – but because of them. In times like these, community support and sustainability tend to become more important to individual investors rather than less. And with data now supporting ESG investing’s performance when stacked up against traditional portfolios, more investors are taking a closer look at these funds and opportunities.
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This UMB Private Wealth Management (UMBPWM) Environmental, Social and Governance (ESG) blog post is provided for informational purposes only and contains no investment advice or recommendations to buy or sell any specific securities or engage in any specific investment strategy. UMBPWM’s interpretation of ESG factors and development of ESG portfolios will differ from ESG portfolios offered through UMBPWM affiliates. Mutual funds and other securities within an ESG portfolio exhibit varying risk and return characteristics and, due to the screening process for funds and securities held within ESG portfolios, portfolio holdings will differ from the applicable benchmark and the returns will vary accordingly, either outperforming or underperforming at any time. You should consult professional advisors before making any tax, legal, financial planning or investment decisions. All investments involve risk, including the possible loss of principal. Past performance is no guarantee of future results.
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