ESG trends translate from US to UK assets

ESG trends translate from US to UK assets

Environmental, social and governance principles will drive the investment decisions of young people across the world, but there are signs that providers and advisers are still proving slow to wake up to this cultural shift.

Following the pattern of ESG investing as a result of the great wealth transfer that is taking place in the US, American financial advice company Sage Advisory has pointed to similar patterns that will develop across the world, with the UK and other similar countries experiencing the so-called ‘Greta Thunberg investment effect’.

Komson Silapachai, CFA and vice-president of research and portfolio strategy at Sage Advisory, said younger investors in the US were leading the way.

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He explained: “Millennials are a generation reliant on 401(k) [pension] plans for retirement savings, representing 75 per cent of the workforce by 2025.”

Because of this, businesses have had to adapt to meet the investment needs of the ‘next generation’, and where the provider or adviser has not been able to do so, investors have gone elsewhere.

Mr Silapachai said: “Given millennial interest in ESG investing, it is no surprise investment professionals have been working to increase the availability of ESG investments, but this has not been true of 401(k) options.

“In 2019 there were over 280 ESG-focused mutual funds and ETFs [exchange traded funds] according to Morningstar, but only four per cent of 401(k) plans have ESG funds available according to Plan Sponsor Council of America.

"However, two-thirds of millennials said they would increase their 401(k) contributions if they knew their investments were doing social good, according to a Natixis survey.”

Emma Smith, ESG research analyst for Sage Advisory, said: “One way millennial investors have been getting around this lack of availability is through the use of ESG-oriented robo-advisers, which have seen inflows over the past several years.

"As ESG investing continues to become mainstream, millennials will continue to contribute investment dollars to this growing and evolving space.”

Global ESG drivers 

Climate change has become a major topic of concern for citizens and governments across the globe, but how might this feed into people's portfolio decisions, and again, what lessons might the UK be able to learn from other countries where investors are starting to vote heavily with their conscience?

Mr Silapachai said the topic was heavily discussed in the 2020 US Democratic presidential debates, and agreed Ms Thunberg has “captivated youth across the world with her message of radical change”.

This, together with the world “receiving a window into a cleaner planet as an unexpected consequence of the current global pandemic”, meant investors were delivered a stark reminder of how much humans can affect the planet, and how that effect can be positive or negative.

And awareness is crucial, with global eyes watching closely what the US does, and investors taking seriously the global threat that climate change presents.

He added: “With the US’ decision to withdraw from the Paris Climate Agreement, now more than ever investors are becoming increasingly aware that change needs to come from all forms of action, including the use of investment dollars. This awareness will likely drive investment portfolios towards climate-focused investments over the next decade.”