Morgan Stanley’s Chad Graves III tells a story about sitting in many a meeting with ultra-high-net-worth families, where the patriarch was sitting on one end of the table and the family’s millennials were sitting on the other. “By the end of the meeting we’d have a chunk of assets in sustainable investments we never would have had if the next generation hadn’t been there,” he told an audience at the 2015 Morningstar Investment Conference. “So when we talk about wealth transfer that is coming in 30 years, the fact of the matter is, it’s happening today. There is a huge opportunity out there.”
Environmental, Social and Governance (ESG) investing has exploded in assets under management since 1995, when there was $639 billion tagged to it, while today that amount is $6.2 trillion, according to Jon Hale, director of manager research, North America, for Morningstar, who moderated a panel of ESG experts at the conference on June . This explosion mirrors client appetite.
According to an February 2015 Morgan Stanley survey of 800 investors, 71% were interested in ESG investing; which includes 84% of millennials, 76% of women, and 62% of men. Further, the number of signatories on the United Nations Principles for Responsible Investing declaration has grown dramatically. In 2006 there were only nine signers of that document, whereas today there are 1,380 asset owners, investment managers and service providers with $59 trillion in AUM on board.
What doesn’t coincide with this growth is advisor interest in ESG investing: According to data cited by Graves in his presentation, only 7% are highly interested, 30% somewhat interested, and a whopping 63% had little or no interest. As Graves quipped: “If that slide doesn’t scream opportunity, I don’t know what does.”
Impact and Returns
Joe Keefe, CEO of Pax World Management, explained that when his fund was launched in 1971, most of these types of funds had the antecedent of religious-based investing, basically screening out anything at odds with values of faith, like Quakers eliminating weapon manufacturers or Muslins eliminating bank stocks.
“[ESG] was greeted skeptically by traditional financial circles because the notion you could shrink the investment universe for non-financial reasons and still get market returns was felt to be counterintuitive,” he explained. “That said, most studies [showed] there was no under performance back in those days, but nonetheless, it created a challenge for the [ESG] industry.”