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Investors Aren’t Putting Money Where Their ESG Mouths Are

More than 40% of affluent investors want their portfolios to support ESG principles. Cerulli says asset managers should figure out why only 1% of net flows are dedicated to those causes.

Investors want their portfolios to do good for the world but they certainly aren’t allocating that way. Over the past five years, exchange-traded funds and mutual funds accounted for an average of just 1% of net flows dedicated to ESG (environmental, social, and governance) principles. (As an acronym, eventually, shareholders, gather, works too.)

As you might have guessed, an overwhelming portion of money is flowing to large market-cap-weighted index funds and lower cost funds from traditional active managers. The three largest mutual funds – the Fidelity Series Total Market Index Fund, Fidelity 500 Index Fund and Vanguard Total Stock Market Index Fund – combined, attracted more than $43 billion in net flows through June of 2019.

For comparison, funds that aren’t even explicitly focused on ESG but qualify as “sustainable investments” attracted more money than ESG-specific funds, according to Morningstar Direct.

The ClearBridge Large Cap Growth Fund, the top U.S. equity ESG mutual fund, by flows, garnered $1.46 billion during the same period. In second place was the Hartford Core Equity Fund with $942 million and the Morgan Stanley Insight Fund attracted $761 million.

Vanguard’s FTSE Social Index Fund took in $732 million, the most of any “sustainable investments” mutual fund with a name clearly supporting ESG principles.

The gap between investors’ interest in ESG and what they are investing in is wide. Across all ages, 41% of affluent investors want their portfolios to support ESG principles, according to a recent report by Cerulli Associates. 

A slight majority of Millennials, 54%, said they would rather invest in companies that have a positive social or environmental impact. Older investors, it seems, don’t care as much about the environment. Only 37% of Baby Boomers felt the same way and only 33% of investors age 74 and older had the same preference, according to the report.

Still, there are enough people who want their portfolio to make a difference beyond their own financial well-being that net flows could be higher.

Cerulli argued in another recent report that model portfolios were the next big opportunity for asset managers. Investor appetite for ESG could be another. Asset managers who identify different ESG screens and themes favored by investors might find more money headed their way.

“This result underscores the importance of asset managers connecting with potential clients early in their investment lifecycle,” said Scott Smith, the director of Advice Relationships at Cerulli Associates. “Helping emerging investors define and implement their initial investment philosophy can positively affect long-term investor loyalty.”