Investors Appear OK With 'ESG' Label: Morningstar
Retail investors feel less polarized about investing along ESG guidelines—a criteria dictating how billions of dollars are allocated in ETFs—than many advisors and those in the financial services industry believe, according to a new behavioral research report from Morningstar.
Even though investing with an environmental, social, and governance lens has garnered harsh political backlash which triggered outflows and exchange-traded fund closures, investors typically have a nuanced perspective on the issue, according to research conducted by Morningstar analyzing 26,784 Reddit posts and comments.
In fact, investors were not using the term ESG, which the researchers said showed it was industry jargon, and talked about specific concerns related to their investments such as climate change, researchers found.
“When we looked at how people were talking about ESG, it was a neutral, even-keeled approach,” Morningstar behavioral scientist Danielle Labotka, one of the report's author, said in an interview. “I thought that was really surprising because when you look at the financial industry and how we talk about ESG in it, you would think it’s an all-out brawl out there, but to the everyday investor, it’s actually just a neutral topic.”
About 50 ETFs holding $86.7 billion employ ESG guidelines, according to etf.com data. The category includes funds that focus on the climate or energy transition, such as the iShares MSCI Global Sustainable Development Goals ETF (SDG), but also describes a method of investing that excludes specific sectors, such as the fossil fuel industry. It may also include investments in so-called clean industries: the largest ETF in the category is the $18.2 billion VanEck Semiconductor ETF (SMH) While ESG-focused funds gained traction in 2021, the term has since fallen out of favor for many investors and advisors, according to financial advisor Johnathan Shenkman.
While investors poured money into ESG ETFs, the category had net outflows of $4.3 billion in the U.S. last year, Bloomberg News reported in February. The iShares ESG Aware MSCI USA ETF (ESGU) itself experienced $9 billion in outflows over 2023, the story said.
ESG Implications For Financial Advisors
Analysts and investors have suggested that the term “ESG” be retired, especially in the U.S., because it's loaded with too many political implications. Investors took note of when BlackRock’s chief executive Larry Fink stopped using the term ESG.
Yet the Morningstar study suggests that to many average Americans, the term does not hold as much weight.
“The biggest takeaway is don’t be afraid,” said Labotka. “A lot of financial advisors that I’ve talked to tend to think of ESG as a tough topic to discuss, but one of the benefits of ESG investing is you are starting to talk about values, and that discussion can actually be helpful for financial advisors who are looking to get their clients invested and committed to their financial plan.”
Contact Lucy Brewster at [email protected].