Investors are all for ESG. except when times are tough

A recently published academic study suggests that individual investors in ESG funds were responding when the COVID-19 pandemic and lockdown blindsided financial markets in early 2020.

Individual-investor demand for socially responsible investing is “highly sensitive to income shocks” and economic stress, said study authors Robin Dotling, assistant professor of finance at the Rotterdam School of Management at Erasmus University in the Netherlands, and Sehoon Kim. concluded. Adjunct Professor at the Warrington College of Business, University of Florida.

The authors’ findings are a reminder that when times get tough for individual investors, not even the idea that they can help save the planet from society’s excesses can persuade them to sell investment products. That they worry could do more damage in a recession.

In contrast, the study found that demand for ESG investments — focused on environmental, social and corporate-governance issues — from institutions such as pension funds and asset management firms remained strong. Those market participants, whose actions are shaped and often constrained by investment mandates, are generally slow to respond to market shocks and do not face the same pressures as individual households from the Covid lockdown And have to bear during the loss of job.

money Matters

When an economic shock reduces our income, we become more risk-averse. And, in the words of the authors, we begin to see the emotional or non-financial appeal of ESG investing as “costly” and “volatile” if it means forfeiting the returns.

“When you’re budgeting for your household, you have a different reaction if your job is to develop asset-allocation plans and generate returns,” says Alyssa Stankiewicz, associate director of sustainability research at investment-research firm Morningstar. Goal setting.”

Certainly, the spectacle of investors fleeing once-high-flying market sectors is nothing new; It dates at least to the decline of tulipmania in the Netherlands in the 17th century. Many of today’s investors can clearly remember the collapse of the dot-com boom at the start of the new century. And whenever headwinds strike, investors tend to seek refuge in sectors they view as safe havens, and stay away from any sectors that are known to pose unexpected risks.

To reach their conclusions, Prosser sifted through data about mutual fund inflows and conducted a survey about investors’ views and expectations for sustainable investing.

The study focused on the period before and after the onset of the worldwide pandemic in early 2020. This highlights that external shocks wreaking havoc on investors’ financial stability and earnings, rather than internal weaknesses in specific market sectors, can trigger selling. Pressure. While some pundits publicly worried that a “green bubble” might be coming to a murky end, the outflows studied by the two professors came in response to a global pandemic that is still reshaping our ideas of risk and return. giving shape.

stress factor

Institutional players who also monitor ESG investment activity found the study’s results intriguing. “This reminds us that when investors seek to express their values ​​in their portfolios during periods of crisis and extreme volatility, they look beyond the ‘feel good factor’ to look at ESG from a risk mitigation and return perspective. Going.” says Sarah Hargreaves, head of sustainability at Commonwealth Financial Network in Waltham, Mass.

Still, Ms Hargreaves cautions that extrapolating to future trends from study results focused on a narrow window in time may be difficult.

“It’s hard to say whether we’re always in a different climate” for investing in general and ESG investing in particular, she says. Sophisticated analysis and increased regulation on the part of investors rather than market or economic headwinds or trends.

Ms Hargreaves also says that as 2022 drew to a close, shareholders were once again rolling out a slew of new ESG-related resolutions in preparation for this year’s batch of corporate annual meetings. “Fund flows may be weak from time to time, but this is not the only indicator of individual interest in stability”.

Meanwhile, Morningstar released its survey of ESG fund flows in late January, showing net inflows of $37 billion on a global basis in the fourth quarter (compared to global outflows for all categories of $200 billion for the same period). In). Furthermore, assets under management in this sustainable category grew 11.6% in the quarter to $2.5 trillion, ending three consecutive quarters of outflows. The picture was a bit murkier in the US: the fourth quarter saw outflows of $6.2 billion, although inflows were positive for the full year.

While the impact of the pandemic on financial markets has abated, other headwinds have taken their place. Rising interest rates and high inflation are now creating a different kind of income shock for investors, although it remains to be seen whether this will affect interest in ESG investing.

One possible outcome, suggested by the results of an online survey of 808 investors in the US conducted as part of the study by the professors, is that investors may be more willing to adopt ESG investing. Most said they believed that commitments to sustainability would be more important as a source or source of financial value for corporations going forward than before the pandemic, while only 11.6% said such commitments will be less important.