2019 is on track to triple the previous annual record for inflows into sustainable and ESG mutual funds and ETFs. We’ll take a look at the rapidly growing popularity of impact investing and what it means for the investment landscape.
Morningstar reports that 2019 has seen record fund flows into sustainable and ESG investments. The calendar-year record to date was in 2018, with just over $5.5 billion in assets going into sustainable investments, and no quarter (before this year) had seen inflows greater than $2 billion. But in 2019, each of the first three quarters has been marked by more than $4 billion in funds headed into sustainable mutual funds and ETFs. This year as a whole is likely to triple the previous record.
For us, this is another sign that our impact investment thesis has been on point, and the rest of the world is beginning to catch on (and catch up). We believe there are several factors contributing to the rapidly increasing popularity of impact investments:
- Business case: People are beginning to realize that a sustainable lens can be a marker for good governance. Businesses that are paying attention to their supply chain sustainability, their brand positioning relative to ESG factors, and their social and environmental impacts are likely stronger than those that are not. In a recent Morgan Stanley survey, 86 percent of survey respondents said they believed that companies with sustainable practices may be more profitable and better long-term investments.
- Millennial wealth: As the millennial generation becomes a larger wealth-holding cohort, we are seeing the effects in the market. Millennials are deeply concerned with issues of sustainability and social conscience, and are seeking ways to use their investment dollars to make an impact.
- Awareness: There is a growing awareness of the depth of the problems facing the world today, and people are recognizing that private capital may be the best way to go after those problems. At the same time, investors are becoming aware of the opportunities this offers, both in terms of long-term return potential and in being able to effect change in the world. As people adjust their consumer behavior to be more mindful of the larger impact they have, they also want to align their investments with their values.
We anticipate that this trend will continue, and that just as 2019 will beat the 2018 record for sustainable fund inflows, 2020 is likely to top both of them. Eighty-five percent of U.S. individual investors expressed interest in sustainable investing in that same sustainable investing survey (95 percent of Millennials), and half said they already have at least one sustainable investment.
As interest in this space continues to grow, it will become more important than ever to exercise discernment and discipline. There is no industry-wide agreement on how best to measure impact, nor even how to clearly identify which investments meet the necessary criteria to earn the label “sustainable” or “ESG.” Beginning by understanding what your objectives are as an investor can help you build the best approach to meet your needs. At Arnerich Massena, building impact portfolios begins with looking at your goals and crafting a strategy based on what will best serve your long-term aspirations.
To learn more about our approach to impact investing, visit http://arnerichmassena.com/about/Impact.htm, where you can access our white paper, Impact Investing: Why, What, How, as well as a series of accompanying podcasts.
Sources: “Sustainable Investing Interest Translating Into Actual Investments” by Jon Hale, Ph.D., CFA; Morningstar; Oct. 31, 2019; https://www.morningstar.com/articles/952254/sustainable-investing-interest-translating-into-actual-investments “Sustainable Signals: Individual Investor Interest Driven by Impact, Conviction and Choice,” Morgan Stanley Institute for Sustainable Investing; Sept. 2019; https://www.morganstanley.com/pub/content/dam/msdotcom/infographics/sustainable-investing/Sustainable_Signals_Individual_Investor_White_Paper_Final.pdf