There's significant momentum around ESG, which refers to investing based on environmental, social, and governance factors. According to research performed here at New York Life Investments, ESG investing terms alone have doubled in online search popularity since 2018. Therefore, as ESG investing becomes more mainstream, it's critical for investors and their financial professionals to get comfortable with this concept.

With that attention, though, comes confusion and misconceptions. Investors who clarify their understanding and get up to speed on ESG investing trends now will be well-placed to spot opportunities early.

We, at New York Life Investments, are committed to helping investors and financial professionals understand why ESG knowledge is so important—and how to overcome the remaining barriers to entry.

The ESG opportunity

According to a 2021 Morningstar report, one in three dollars of overall assets under management in the U.S. is currently subject to some type of ESG investment strategy.

Meanwhile, our research data shows that a growing number of investors are becoming interested in aligning their investments with their values. Today, 56% of women and 44% of men can be classified as values-driven consumers and investors, meaning they've taken actions such as boycotting a brand, divesting a portfolio of a company, or changing the types of products they consume based on their values.

And it's not just millennials. The number of people ages 36–49 who actively consider company values when making purchases rose to 51% in 2017 from 46% in 2015. For those ages 50–59, it rose to 41% from 34% in the same time frame, and for people ages 60–70, it rose to 33% from 23%.

These investors have highly diversified portfolios, with 60% owning bonds, 42% owning equities, and 39% owning exchange-traded funds. Twenty-nine percent said their views on social issues would have a major impact on their future investment decisions.

But despite the clear investor interest and the impressive growth of the sector, financial professionals and individual investors remain on the sidelines of this trend. Instead, nearly three-quarters of ESG investments made have been on behalf of institutional investors, according to the Forum for Sustainable and Responsible Investment Foundation.

Barriers to entry

From the explosion of media coverage to continuously emerging research on ESG investing trends, much is changing in this space, and investors and financial professionals may struggle to stay up to speed. Here's a look at the biggest obstacles that better ESG education can help them overcome.

Alphabet soup

For a simple example of these barriers to entry, consider the complicated language associated with ESG investing. A 2017 study found that, even among investment firms that actively practice ESG investing, 56% said there was confusion about ESG terminology within their organizations.1

Four years later, the range of terms and closely related industry labels is wider than ever. Beyond ESG, there's "socially responsible investing,” the original approach to sustainable investing involving eliminating exposure to harmful sectors, as well as "impact investing," or investing with the intent to generate positive, measurable effects alongside financial returns.

Fragmented frameworks and regulations

Adding to the uncertainty are the industry's various and not yet unified frameworks. Globally, there's the Sustainability Accounting Standards Board (SASB) and the Principles for Responsible Investment (PRI), among others. Organizations like the World Economic Forum (WEF) and the CFA Institute have also stepped up to offer their own frameworks, while third-party ESG data providers have built a lucrative market. On specific issues like the environment, other standards bodies come into play, such as the Task Force on Climate-Related Financial Disclosures (TCFD).

Global regulations are likewise uneven, and the situation is shifting quickly. There's turmoil within the U.S., too. The lack of a widely accepted governing framework played into the Department of Labor's (DOL) recent efforts to provide ESG guidance for retirement plans that fall under the Employee Retirement Income Security Act. In June 2020, the DOL proposed a rule to restrict the ability of fiduciaries from investing in ESG assets in many cases. After public pushback, it amended the proposal in October with a final rule that rolled back some of the original restrictions, while nonetheless stating that investment decisions must be based on financial factors alone, and not "non-pecuniary" factors—which might include ESG considerations. Finally, in March 2021, the DOL announced it wouldn't enforce the rule, intending instead to revisit the question.

ESG myths and misconceptions

Some investors also hold myths and misconceptions about ESG investing, which can persist without the right education. For example, many investors believe ESG-related investments underperform financially, but the evidence overwhelmingly suggests that investors don't need to compromise on performance to invest sustainably. According to Morningstar, sustainable equity funds on average outperformed their conventional counterparts in 2020.

Some investors also view ESG investing as a passing fad. In reality, the ESG universe continues to grow. The number of ESG funds available to U.S. investors increased to 392 in 2020, up 30% from 2019, with a nearly fourfold increase over the past 10 years, according to Morningstar. A record $51.1 billion in net flows were attracted in 2020, with sustainable fund flows making up nearly a fourth of overall flows into U.S. funds.

Building ESG education

It's crucial for investors and financial professionals alike to get past these hurdles and build a strong ESG knowledge base. Remaining undereducated or mistaken about the validity of ESG could mean missing a window of opportunity. Investors who are well-grounded in their understanding of ESG investing will be better able to sort fact from fiction and find the ESG investments that are aligned with their goals.

Financial professionals in particular must assess and correct their education gaps, since financial professional relationships are often how investors gain ESG awareness. Forty-four percent of investors told New York Life Investments that they would be extremely or very interested in an ESG mutual fund if suggested by a financial professional. Among those who have invested in ESG mutual funds, 44% did so because it was recommended by their financial professionals. But we found that only 20% of investors had been recommended ESG-based strategies by their financial professionals, while 38% said they were very or extremely interested in discussing such strategies with their financial professionals in the future.

To learn more, investors and financial professionals can turn to resources like Candriam Academy, a free and accredited educational platform from New York Life Investments that brings together subject matter experts from around the world. Candriam Academy offers a comprehensive introduction to ESG investing course, as well as a series of ESG Talks video courses on interesting—but vital—topics like the overlap of ESG factors, ESG data, and global regulations.

While the material offered through Candriam Academy is free to anyone, financial professionals also have the benefit of earning continuing education credits that can bolster their influence with clients. Candriam Academy is updated regularly with new videos and courses, so check back often.

Start learning with Candriam Academy.

1. Source: State Street Global Advisors, “ESG Institutional Investor Survey: Performing for the Future,” 2017.

IMPORTANT DISCLOSURES

Insights presented in this report are derived from a 2019 study conducted by New York Life Investments and RTi Research, as of September 2019. Results are based on survey questions asked of 594 investors, both men and women, with investable assets over $250k, ranging in age from 25-39; 40-54; and 55+.

There is no assurance that the investment objectives will be met. Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value.

Impact investing and/or environmental, social and governance (ESG) managers may take into consideration factors beyond traditional financial information to select securities, which could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. Further, ESG strategies may rely on certain values-based criteria to eliminate exposures found in similar strategies or broad market benchmarks, which could also result in relative investment performance deviating.

Opinions expressed are current opinions as of the date appearing in this material only and are subject to change. This material is intended to be educational and informative in nature; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds, financial products, or any particular issuer/security.

The information presented herein is current only as of the date of this material. Any forward-looking statements are based on a number of assumptions concerning future events and although we believe that the sources used are reliable, the information contained in these materials has not been independently verified and its accuracy is not guaranteed.

The information discussed is strictly for educational purposes and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any information discussed will be effective or that market expectation will be achieved.

This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial professional before making an investment decision.

New York Life Investments is both a service mark, and the common trade name, of certain investment advisors affiliated with New York Life Insurance Company, New York, New York 10010.

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