Will Values-Based Investing Ever Take Off?
By Daren Fonda
Jonathan Stachel would love to invest his savings in companies making a positive social or environmental impact. But at age 24, he doesn’t have much disposable income to invest. And while he serves on the “green committee” of his employer, Research Affiliates, he doesn’t see many funds he likes that incorporate environmental, social, or governance factors, known as ESG. “It’s nothing against my desire to be in ESG funds; it’s my aversion to paying high fees for active management,” says Stachel. “I’d be all over ESG funds if there were more options.”
Stachel’s dilemma illustrates the promise and challenges of values-based investing. While ESG has gone mainstream in the institutional asset-management world, it has barely dented the “retail” fund industry of individual investors. Mutual and exchange-traded funds that reference ESG in their prospectus documents held just $161 billion in assets at the end of 2018, according to Morningstar, a sliver of the $22.1 trillion in total U.S. fund assets. The ESG asset figure had risen to $525 billion by June, as more fund companies said they may consider ESG metrics. Figures are rising as new funds and ETFs come out. Demand appears strong, especially among women and the millennial generation. But for ESG to go mainstream, it will have to overcome obstacles—including confusion about what it means and whether it’s compatible with the goals of most advisors and investors: to maximize returns.
Photo courtesy of Sudipto Sarkar.