Investing with a Conscience: The Rise of ESG

Socially responsible investing has really blossomed in the past few years. What used to be viewed as a niche investment philosophy is now firmly planted in the mainstream, with everyday consumers using their dollars to support companies that align with their personal values around sustainability and social progressiveness.

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But beyond the day-to-day choices, like what stores to frequent and what products to purchase, consumers are turning to environmental, social and governance (ESG) standards to help inform their investment decisions. In a recent study* by Allianz Life, nearly 80% of people said they “love the idea of investing in companies that care about the same issues” they do, and 73% feel it’s a way to reward a company’s good behavior. On the flip side, 71% said they would stop investing in a company if it behaved in ways they consider unethical.

While a lot of the buzz around ESG tends to focus on the environmental aspect (think of all we have heard recently with climate change activism, the move toward renewable energy, eliminating single-use plastics, etc.), the Allianz Life study found that people care just as much about social and governance issues.

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When asked about the importance of a variety of ESG topics in making a decision to invest in a company, 73% cited environmental concerns like natural resource conservation or a company’s carbon footprint/impact on climate change as important factors. But the exact same percentage emphasized social issues, such as working conditions or racial or gender equality, and a similar amount (69%) noted governance topics, such as transparency of business practices and finances or level of executive compensation, as influential elements in their decision of whether to invest in a company.

Walking the Walk

While people say they care about all these issues, when it comes to investing, are they actually walking the walk? The short answer is no. After all, it’s easier to say something than to commit to doing it — especially when it comes to money.

For example, 84% of people in the study said that a company’s ability to provide safe working conditions for its employees was important in their decision to invest, but only 42% said they have actually taken action and chosen to invest or not invest based on that business practice.

The barriers to actually taking that next step and putting their money where their mouth certainly vary. Some may face challenges doing research and actually finding out more about ESG factors, with over three-quarters of Americans (76%) saying they don’t know how to evaluate if the companies included in an ESG investment are good corporate citizens or not. Over half say they think it would be difficult to find information on issues like the transparency of a business’s practices, its record on racial equality and the working conditions of their employees. Others cite a lack of uniform standards on how a company qualifies for ESG investing.

However, as the demand for ESG increases, companies may respond by increasing their transparency efforts or increasing communications on corporate social responsibility efforts.

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Here to Stay

When it comes to socially responsible investing, some discrepancies still exist, and while not everyone is on board the ESG train, we can expect that the focus on ESG investing is here to stay. Over half of people who do not currently have money in ESG investments say they would be interested in having at least some money in them.

Consumers are attracted to ESG investing, not only for the social reasons and a desire to encourage companies to “do good,” but due to the belief that ESG investing is a smart financial choice — particularly over the long term. Nearly three-quarters of people believe an ESG investment strategy is not only one that you can feel good about, but one that makes long-term financial sense.

This is another aspect of ESG investing — the idea that companies with strong ESG practices generally are more sustainable and align with longer-term investing. Those looking to start investing in ESG should work with their financial professional to identify investments that can create a positive impact on their overall portfolio.

How Investors and Consumers Can Get Involved

Consumer focus on ESG investing and supporting companies that do good is on the rise, and forward-thinking companies are taking note. Everyday investors looking to join the ranks of impact investors have an increasing number of resources available to learn more about these initiatives and take the next step, such as the United Nations Sustainable Development Goals Knowledge Platform or the Principles for Responsible Investment.

People also can start by speaking to their financial professional and expressing their interest in ESG investing. Discuss goals and what issues might be most important — whether they fall into the environmental, social or governance bucket, or some combination — and together create an ESG strategy that makes sense for their specific financial situation.

As demand grows, more companies will feel the pressure to accommodate consumer demand and keep shareholders happy. Consumers can keep pace by doing good with their investments, which in turn can help society, the planet and their investment portfolio.

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*Allianz Life Insurance Company of North America conducted an online survey, the Allianz Life ESG Investor Sentiment Study, in December 2018 with a nationally representative sample of 1,000 respondents ages 18 years or older.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Kelly LaVigne is vice president of advanced markets for Allianz Life Insurance Co., where he is responsible for the development of programs that assist financial professionals in serving clients with retirement, estate planning and tax-related strategies.