Recent research shows that consumers, by and large, care about issues relating to the environment and sustainability, at least on a small-scale and immediate level. For instance, around two-thirds of shoppers say they’re willing to pay more for goods and services that are considered eco-friendly. However, when they set their sights on longer-term investments, those same consumers are more hesitant about where they put their money. Environmental, Social, and Governance (ESG) investing, which considers environmental impact, social responsibility, and corporate governance alongside financial performance, has attracted growing interest among investors. Even so, many consumers want to support measures that fall under the ESG umbrella without putting their future wealth at unnecessary risk.
In other words, pragmatic investors may delay getting into the ESG investing ecosystem. And there are several understandable reasons why they’re being cautious.
First is the relative newness of ESG investments. The concept of investing mainly in ESG-focused products has evolved in the past couple of decades. Consequently, there is no definitive consensus on long-term performance compared to traditional investments. In other words, it’s a bit of a risk and many long-range investors don’t have a high risk tolerance. That said, younger Gen Z investors are more willing to take a chance on ESG funds than Millennial and Gen X investors, likely because they have more time to wait and see what happens before tapping into their returns.
Secondly, the rules and regulations for the meaning of ESG are still being developed. Again, this creates concern among some investors that now might be too soon to invest in ESG opportunities. They might still be curious and open to the possibilities, but they’re concerned about jumping in too quickly.
Finally, some people are confused about ESG investing. Does it mean that their portfolio can have a mix of ESG-related investment vehicles? Or should they place all their funds into ESG-only options? These, and other, questions remain on their minds as they make long-term investment decisions.
Again, these concerns are completely valid. Investors don’t want to sink their money into financial products that won’t deliver.
What’s the solution to help investors feel more comfortable with the ESG market? One solution is through ESG transparency. By making ESG investing less murky and confusing, investment product owners can more easily attract investors.
Practical ways to improve ESG transparency for fund or vehicle owners
To be sure, moving toward ESG transparency isn’t always intuitive for investment owners. But taking three steps can work.
The first step is to make sure that all ESG investment data is auditable, meaning it can be tracked and analyzed. As analytics consulting service provider EY has discussed, the pandemic accelerated a movement toward ESG investing. However, investors aren’t just willing to take anticipated ESG return predictions at face value, especially without data. Consequently, investment vehicle owners need to make sure that their ESG data is structured in a way that can be used to show investor clients the possible values of long-term investing using real, accurate insights.
The next step is to provide education to investors about what ESG actually means in terms of an investment product. Although ESG disclosures are a rule, they’re not necessarily written in layman’s terms. Investors may be confused about what makes a product fall into the ESG category and what it will mean for them when they cash out decades in the future. For them, having more information can ease any concerns that they might be making an unwise choice. Simply because a stock is touted as “socially responsible” or shares in “green” businesses are available doesn’t mean much to some investors. They aren’t as excited by jargon or buzzwords as they are by concrete insights on how and why an opportunity falls into the ESG category.
The third step toward ESG transparency is for all ESG investment owners to maintain compliance with emerging and evolving regulations. Governance around ESG investments has become more involved. As a result, owners must stay on top of ESG regulatory rules and expectations. That way, they can avoid questionable publicity, as well as maintain the highest level of security, authority, and brand reputation.
ESG transparency to drive trust and commitment
For long-term investors, building personal and generational wealth remains a high priority. Though many may be interested theoretically in ESG investing, they may not have made the leap due to concerns over some aspects of ESG products.
By focusing on ESG transparency, ESG investment product owners and wealth management firms can help investors see the real potential in a variety of vehicles. As a result, both young and seasoned investors will feel more informed about exactly what they can expect from every ESG product they support.
