Non-financial wants and the rise of ESG investing

May 16, 2017

In managing their retirement investments, there are many ways people may want to modify the mix of securities they own to make it more palatable, even if they potentially give up some return…some investors want to exclude certain companies–such as those associated with nuclear energy or weapons or tobacco or contraceptives–to invest in a “socially responsible” way. A survey by the Spectrem Group found that 37% of investors with a net worth of $1 million to $5 million consider social responsibility when they pick securities. — Meir Statman, Money, June 2017, pp. 30–31.*

In a world of nearly a hundred boxes of cereal on the grocery store shelf and literally millions of hours of on-demand entertainment at our fingertips it should not be surprising that investors want to express their values through their portfolios. These “non-financial wants” as Statman calls them are a recognition that we are neither entirely rational or irrational, but human.

Source: US SIF Foundation

These humans with non-financial wants are demanding easier access to ESG (environmental, social and governance) type of investments. For example, ETFdb.com includes 33 ESG-related funds in their database. The largest, the iShares MSCI KLD 400 Social ETF ($DSI), has some $830 million in AUM. The second largest (and oldest), the iShares MSCI USA ESG Select ETF ($KLD), has some $537 million in AUM. There is clearly demand for these funds and they represent my theory of “keeping ETFs weird.” That is, we should celebrate the fact that the ETF marketplace is one in which experiments can take place.

ETFs are not the only place where ESG investing is taking hold. Just this week I noticed items about OpenInvest, Swell and ImpactAdvisor entering the ESG robo-advisor space. Robo-advisors, or automated investment platforms, are a great way to implement ESG-focused portfolio because of the customizable nature of those portfolios. This Investment News article highlights OpenInvest, Grow and Earthfolio. As you can see in this post there is no shortage of stand alone firms trying to make waves in the ESG space.

The big question from the business perspective is whether investors will want (or need) to go with ESG-only robo-advisors. In the traditional robo-advisor space it is the big incumbents like Vanguard and Schwab that have come to dominate the space. The venture capital-backed pioneers like Betterment, Wealthfront and Personal Capital are all looking for ways to grow assets under management and become profitable businesses. The more likely scenario for ESG is that mainstream managers like, Ritholtz Wealth Management which already offers an ESG version of their classic asset allocation models, will allow investors to adopt ESG strategies.

So at some point in the future, what we call ESG investing today, will simply be called ‘investing.’ In the meantime keep an eye out for the wave of ESG-focused robo-advisors. Let’s see if they can make headway before the incumbents take full notice.

*Adapted from Meir Statman’s new book Finance for Normal People: How Investors and Markets Behave.


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Originally published at abnormalreturns.com on May 16, 2017.