While there is no doubt that investors have embraced ESG (environment, social and governance) investing, their knowledge of the companies and asset managers exposed to it shows that investors could use more research and better ESG filtering tools.
According to a recent survey by Investopedia and Treehugger, most investors admit that when it comes to researching companies and their ESG impact, they soar. The most common signal to investors that an investment meets their ESG criteria is that the company is generally viewed as “better” than its industry peers in ESG initiatives. Most do not use ESG equity filters or ESG dashboards from financial services or equity research providers.
According to the survey results, the main way for ESG investors to apply ESG criteria to their investment decisions is to invest in individual companies and exclude industries from their portfolios. 45% say they have invested in a company or fund, while 29% say they have divested or sold for ESG reasons.
The ESG winner is… Tesla
From a list of top U.S. companies known for their ESG initiatives or alignment, Tesla has emerged as the leader of the pack, with nearly a third of survey respondents identifying Tesla as being closely aligned with ESG stocks. Just over a third responded that none of the companies seemed closely aligned with ESG standards.
While EV maker Tesla may be associated with some environmental aspects of ESG, its overall rating on ESG filters like Sustainalytics and MSCI is average. In fact, Sustainalytics, an ESG data and research and impact investing company, ranks Tesla as a “high risk” exposure on several ESG criteria. MSCI ranks Tesla among the industry leaders in “clean technology” and “business behavior”, but also says Tesla lags behind its industry peers in “work management.”
Meanwhile, Apple, the second most popular choice in ESG-related companies with 30% of survey respondents, has a slightly better ESG rating by Sustainalytics and MSCI. Sustainalytics suggests that the iPhone maker has a low risk of exposure to ESG factors and that its management team is effectively managing ESG risks. MSCI, on the other hand, gives Apple an average rating on ESG concerns and says it lags behind on issues relating to company behavior, supply chain standards and e-waste.
Research from Investopedia and Treehugger shows that as demand for ESG investments grows, investors want better ways to spot ESG issues. Less than half or 37% of ESG investors say ESG funds and equity filters help them assess whether an investment meets their ESG standards. A recurring theme in the survey’s open-ended questions was responses noting readers’ dissatisfaction with the tools available to capture precise ESG metrics, or knowing how well an investment aligns with their values.
How ESG investors find information and integrate ESG criteria
When it comes to sources of ESG-related information, most ESG investors surveyed said they looked to financial and trading websites. Watch groups were less popular, with only around a third or 32% of investors reporting turning to them for information on ESG investments.
Vanguard is a leader in ETF recognition
In terms of ETF awareness among Investopedia and Treehugger readers, Vanguard leads the way with more than half or 55% of respondents knowing the brand as an ETF provider, and 28% knowing its ESG offerings. Fidelity came in second and iShares came in third for overall ETF awareness at 38% and ESG awareness at 18%. Survey respondents may already be clients of companies they associate with ESG investing, but the association of the Vanguard brand with the investing theme is still very strong. For most of the other investment firms in the survey, awareness of ESG offerings fell to around a third of those who were aware of the brand.
While Vanguard is an industry leader in providing ESG investment funds, its main ESG fund, the Vanguard FTSE Social Index fund, captures a fraction of the giant’s $ 7.2 trillion in assets under management (AUM). the investment with its AUM $ 10.87 billion. In fact, according to the MSCI ranking of the best ESG investment funds, Vanguard comes in third behind the Parnassus Core Equity Fund, with $ 22.94 billion in ESG-related assets under management, and the iShares ESG Aware. Fund, with $ 13 billion. Fidelity Investments, the brand ranked second among readers in terms of ESG awareness, does not have a single fund on the MSCI list of best ESG funds in 2021.
Investors are increasingly keen to align their investments with ESG-related companies and fund providers, but many rely on their personal judgment on what constitutes an ESG investment and do not use the research and the measures available from ESG rating providers. This is a huge opportunity for the financial services industry, as ESG investments are only likely to grow, with 67% of respondents planning to invest more in companies with strong ESG initiatives over the next five years.
Data by Amanda Morelli / Adrian Nesta.