ESG Investing Attracts the Young and the Wealthy

ESG Investing Attracts the Young and the Wealthy

Polina Marinova, deputy editor of Fortune Venture, speaks to young investors at the Fortune Brainstorm Tech conference, which focused on artificial intelligence, capital investment, cybersecurity, and impact investing. Aspen, Colorado, July 16, 2019. (Photo by Michael Faas for Fortune Magazine) Creative Commons license via Flickr

By Sunny Lewis

FRANKFURT, Germany, September 19, 2019 ( News) – “The new generation of wealthy clients, as well as society as a whole, is increasingly aware of the responsibility associated with large fortunes and the positive impact of ESG factors on returns,” said the man responsible for Deutsche Bank’s global wealth business, Fabrizio Campelli.

“Our customers rightly expect us to enable them to spend their money wisely,” said Campelli in a statement issued by Deutsche Bank on Monday. He said the bank provides its clients with information about ESG risks and opportunities when making their investment decisions.

An investment strategy grounded in E-S-G: Environment, Social and Governance, has become important to the upcoming generation of wealthy people.

Environmental criteria consider how a company performs in relation to the natural resources it consumes, its respect for air, land and water, and its handling of waste.

Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates.

Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

Surveys have shown that for most of the millennials it is important that the companies they invest in comply with the ESG criteria.

The Global Sustainable Investment Alliance estimates that ESG’s assets in the five largest financial markets in the world amount to over $30 trillion; that is about one third of the invested assets worldwide.

At Deutsche Bank Campelli said, “This fast-growing area is very important not only for our clients, but also for the future of our business and society as a whole.”

“ESG is more and more a topic in our discussions with customers,” he explained. “So the analysis of ESG factors, advice and investment are no longer just an important part of what we offer customers, but the issue is increasingly becoming the foundation of everything we do.”

He said Deutsche Bank’s Wealth Management division is expanding its range of ESG asset management products, offering not only investment advisory services but also new analytics, information and events.

Deutsche Bank stated that it “attaches great importance to sustainable business in all areas of the company.” It wants to become more transparent and, through its risk management, make sure that its business areas do not have a negative impact on the environment and society.

Every year since 2002 Deutsche Bank publishes information on sustainability and non-financial issues, most recently in 2018.

Popular Is as ROI Does

This image of taking euros from a wallet was shot November 22, 2017 (Photo by Marco Verch) Creative Commons license via Flickr

“For the past several years, investors are focusing a lot of attention on ESG investing and it is becoming very popular,” wrote Adam Sarhan in “Forbes” last March.

Sarhan wrote that, “companies that focus on ESG factors tend to out-perform their peers. That has played a major role in why ESG investing has become so popular.”

“Clearly, ESG investing is gaining in popularity because not only are the stocks acting well but investors are able to benefit from the positive impact,” wrote Sarhan.

But some critics are pushing back on the idea that ESG investors out-perform their peers.

Pacific Research Institute for Public Policy, PRI, a San Francisco-based free-market think tank, is one of those critics.

A new report by Dr. Wayne Winegarden titled, “Environmental, Social and Governmental (ESG) Investing: an Evaluation of the Evidence,” concludes that ESG investing may provide a disappointing return for investors.

“Judged against its past performance, ESG funds have not yet shown the ability to match the returns from simply investing in a broad-based index fund,” writes Dr. Winegarden.

“By intention, ESG funds limit their investment options, creating higher investment risks. ESG funds also charge investors higher expense ratios and typically earn lower investment returns. Based on this historical performance, ESG funds provide investors with financially inferior results,” Winegarden says.

“Some investors may prioritize other non-financial goals in addition to their investment returns, and for these investors, the lower financial returns may not be relevant,” he wrote.

For other investors, such as public pension funds that have fiduciary responsibilities to their investors, the lower financial returns do matter. Winegarden writes, “The historical data does not recommend that these investors should invest in ESG fund.”

“While ESG programs can be financially viable, these programs can also be financially harmful and there are many studies that have concluded that ESG programs are often detrimental to a firm’s financial performance or, at best, simply a distraction,” Winegarden notes.

He points to a “striking” survey released earlier this year by the Spectrem Group based in the wealthy Chicago suburb of Lake Forest, Illinois. The survey found that 88 percent of public pension plan beneficiaries want plan assets to be used for maximizing returns and not political agendas, even if they agree with whatever cause the overseers of the plan may be advocating.

Millennials now surpass Baby Boomers as the nation’s largest living adult generation, and the way in which they invest their money is becoming increasingly important to financial advisors, the Spectrem Group said in a statement earlier this month.

“As America’s largest generation, Millennials have fully arrived as investors,” said Spectrem President George H. Walper Jr. “They matter now to all financial advisors and providers who are paying attention to generational changes among investors. This new study helps shed light on how high-income Millennials are saving or spending their money, and how they are allocating their investable assets.”

Regulators Zero In On ESG Disclosure

In the last three years ESG-related regulations grew by more than 100 percent across the United Kingdom, the United States and Canada, indicating that ESG regulatory landscape is evolving fast. And this trend looks set to continue, according to a new report from Datamaran, an international data analysis firm specializing in ESG information.

Child in Phnom Krom Village on Ton Le Sap Lake, Siem Reap Province, Cambodia says thank you for clean water and public toilets, the results of a collaborative economic development project between Suwon City, South Korea and Cambodia. Another project, Water for Cambodia placed biosand filters throughout the village to further improve sanitation. January 10, 2019 (Photo by Cocoabiscuit) Creative Commons license via Flickr

Datamaran’s Global Insights Report analyzed the evolution of ESG regulations from 2013 to 2018, and found that in the last three years, ESG regulations grew by 158 percent in the UK, and by 145 percent in the United States and Canada.

The most regulated topics are business ethics and climate change in financial services, energy use and consumer rights in the U.S. utilities, and product and service safety in healthcare and pharmaceuticals.

For some sectors, such as utilities, healthcare and pharmaceuticals, the majority of sector-specific regulations published after 2015 are mandatory.

Financial Services sector specific regulations have almost doubled in the past three years in the United States and the UK.

Eighteen of 20 sector-specific regulations in the U.S. utilities are mandatory and eight of nine are mandatory in the UK. Social and environmental topics have become more prominent in these recent regulations, Datamaran reports.

The bottom line is that a new generation of wealthy customers want to invest their money sustainably and meaningfully.

Matthew Patsky, CFA and Chief Executive Officer and Portfolio Manager with Trillium Asset Management, wrote on the John Hancock financial services company website as far back as 2016, “Trillium Asset Management has affected many issues through our ESG advocacy, including climate change; toxic chemicals; labor practices; diversity, gender, and inclusion policies; and board diversity.”

“Perhaps most important for investors,” wrote Patsky, “studies have shown that operational and stock price performance of companies may be positively influenced by good sustainability and ESG practices.”

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