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FINRA Survey Suggests Many ESG Investors May be Unaware Followers
Are ESG investors like airline passengers? A recent FINRA survey indicates, yes.
Perhaps you do this; when I get off the plane in a strange airport, I follow the crowd until I figure out where the baggage claim is. Sometimes, after a couple of minutes, I’ll ask someone that looks confident and was on my plane, where baggage is. I often find out they don’t know either; they have just been following others like me.
Survey of Investors About ESG
Gerri M. Walsh is the president of the FINRA Investor Education Foundation. Along with the NORC of the University of Chicago, they surveyed retail investors on their knowledge of Environmental, Social, and Governance (ESG) investing. Investing in funds and securities that have been designated as ESG has been a hot trend. Growth in ETFs alone has gone from $78 billion in 2019 to $378 billion earlier this year. This is a 485% increase in just over three years.
Since the trend toward investing in the ESG category is showing rampant growth, one might expect those among the herd know where they’re headed. This survey discovered instead that about one in four people believes the acronym stands for “earnings, stock, growth,” according to this well-formulated study.
Global Growth ESG ETF Assets from 2006 to February 2022 ($Billion)
Data: Statista
Survey Results
“Retail investors don’t understand ESG investing—only 9% say that they have ESG-related investments, and the familiarity with the concept is not as high or as broad as some of the coverage on the topic of ESG investing might suggest,” says Gerri Walsh.
Of the 1,228 investors surveyed, only 24% could correctly define ESG investing, and just 21% knew what the letters in ESG stood for. Walsh says this discovery is “both surprising and concerning.”
“If people are going to be thinking about these issues, we need to make sure that investors understand what we’re talking about, especially retail investors,” says FINRA’s president of investor education. “We need to make sure that people understand the terminology that’s being used, and what’s behind ESG investing.”
As uncovered by the survey, respondents said environmental factors were the least important when investing. The most important consideration respondents said are financial factors, including whether an investment has the potential for high returns, the related risk, and the associated fees. Perhaps the massive inflow into ESG funds has been performance-driven much more than the criteria followed by ESG funds.
The survey did, however, find that intentional ESG investors are highly motivated by ESG factors, especially the environment. When it comes to ESG funds’ performance, the greater part of investors (41%) believes that returns for companies that prioritize their impact on the environment and society will be the same as the overall market. Only 14% expect ESG investments to outperform the market.
Recent Performance Comparison
For the year 2021, a year strong year for stocks when the broader market was up 28.7% ($IVV), sustainable index funds produced similar returns. According to Morningstar data, the 13 ESG index funds available to U.S. investors that follow broad, diversified indexes of U.S. large-cap stocks posted gains ranging from 25.6% to 31.7%. Their average return was 29.2%, or 0.50% higher than the broad non-ESG specific measure.
Take-Away
There are all styles of investing. This is part of what makes markets. One conclusion that can be drawn from a recent collaboration by investment and research organizations is that ESG investors while growing in numbers, may not be intentionally investing in stocks of environmental, social, and corporate governance-minded companies. Perhaps this means investors were just following the amplified buzz around these investments. Or, it could hint that they were chasing returns that, in some cases, were running higher than the overall market.
What is now empirically shown is that only 14% believe that ESG will naturally outperform non-categorized investments. However, investing in ESG, whether intentional or not, has not been a bad move.
Managing Editor, Channelchek
Suggested Reading
Issues Driving ESG Investing
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What’s an ESG Score?
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ESG Growing Pains Include Greenwashing
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Are Small-Cap Stocks Smart Investments?
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Sources
https://www.finra.org/about/executives/gerri-walsh
https://www.barrons.com/articles/esg-meaning-sustainable-investing-study-51649719876
https://www.morningstar.com/products/esg-investing
https://www.statista.com/topics/7463/esg-and-impact-investing/
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