What Does An ESG Investor Look Like?

Posted by FlexShares on Sep 26, 2017 8:30:00 AM


Attracting ESG investors means understanding their mindset and their investor profile. Generally speaking, we believe that ESG investors are savvy people who are purpose-driven in all they do, including where they entrust their money.

Here are four other important characteristics of ESG investors:

They tend to be younger and they care about performance.

Many ESG investors are Gen Xers or Millennials whose parents may have been socially responsible investors (SRI).[1] SRI investors aggressively sought to exclude any company or sector from stock portfolios that was incompatible with their values, regardless of the impact on fund performance.

ESG investors actively identify companies with strong ESG-based values and policies (often based on a “best in class" scoring model). They research and invest in funds where managers only add those companies to ETF portfolios.[2]

In contrast to SRI investors, ESG investors care as much about how well their ETF portfolios perform as the values of the companies behind the securities underlying the fund. They know that businesses that operate based on ESG principles tend to perform better and may generate more returns for investors, yielding dividends ESG investors feel comfortable accepting.[3]

They are concerned about what their investing supports, and use digital tools for discovery.

We believe younger investors grew up barraged with information about company activities and used that information to engage with brands. Today's ESG investors are tech-smart. They find data online quickly and can know nearly instantly how companies and business sectors are affecting their world. They typically make every decision, especially those related to spending money, based on how a company's actions might negatively affect the environment or impact social justice.[4] We believe that they're determined to only entrust their investment dollars to companies that care about ESG, too.

They are typically focused on one aspect of ESG.

You might call ESG investors “social activist investors" because they care deeply about a specific aspect of ESG. If they concentrate on the “E" in ESG, they have environmentalist leanings. One way they can protest damaging environmental activities by companies is through their investment choices.

For those concerned about the “S" in ESG, social justice may be their primary concern. They'll carefully research brand treatment of others in that context. Then, for example, they may avoid real estate ETFs weighted negatively toward brand securities with a record of discriminating against certain protected classes. [5]

Considerations around the “G", or governance aspect of ESG, might be reflected in the ESG investor's rejection of ETFs with underlying securities whose ownership either can't be determined or demonstrates a history of disregarding shareholders' rights.

ESG investors buy ETFs containing securities tilted toward brands that have a strong commitment to environmental, social, and governance considerations. But because they're not SRI or exclusionary investors, they may consider ETFs containing securities of companies that have turned themselves around in specific areas. [6]

This group of investors uses credible data to make sure convictions aren't just talk. They expect companies to show these values in their daily operations.

They want advisors who respect their ideals and values.

Our opinion is that these investors want investor-centric advisors who primarily offer and manage ETFs from providers who practice ESG principles in their daily operations. Thus even passive ETF investors want active relationships with advisors and we believe expect you to partner with them in their investing activities. ESG investors need advisors who can provide them specific information on underlying securities when they ask for that information. They may also expect education and guidance in selecting ETFs that support their ESG focus and to understand how they've been structured to benefit investors.

All these are aspects of a relationship built on trust for those managing their funds. ESG investors may not direct their investment dollars to firms where they can't build this trusted relationship with their advisor.

Written in conjunction with Dahna Chandler utilizing Contently. Dahna is an award-winning business and finance journalist who's written for major media outlets for 20 years.

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FlexShares STOXX® US ESG Impact Index Fund (ESG) and the FlexShares STOXX® Global ESG Impact Index Fund (ESGG) are passively managed and use a representative sampling strategy to track their underlying index respectively. Use of a representative sampling strategy creates tracking risk where the Fund's performance could vary substantially from the performance of the underlying index. The Funds are subject to environmental, social and governance (ESG) Investment Risk, which is the risk that because the methodology of the Underlying Indices selects and assigns weights to securities of issuers for non-financial reasons, the Funds may underperform the broader equity market or other funds that do not utilize ESG criteria when selecting investments. The Funds are also at increased risk of industry concentration, where it may be more than 25% invested in the assets of a single industry. For ESGG, investments in foreign market securities involve certain risks such as currency volatility, political and social instability and reduced market liquidity. The Funds may also invest in derivative instruments. Changes in the value of the derivative may not correlate with the underlying asset, rate or index and the Funds could lose more than the principal amount invested.

[1] Tom Petruno, "10 Stocks for Socially Responsible Investors," Kiplinger, October 2014, Accessed September 2017 from http://www.kiplinger.com/slideshow/investing/T052-S003-best-stocks-for-socially-responsible-investors/index.html.

[2] Organization for Economic Cooperation and Development, "Investment governance and the integration of environmental, social and governance factors," 2017, Accessed September 2017 from https://www.oecd.org/finance/Investment-Governance-Integration-ESG-Factors.pdf.

[3] Matthew W. Sherwood and Julia L. Pollard, "The risk-adjusted return potential of integrating ESG strategies into into emerging market equities," Journal of Sustainable Finance and Investment, Accessed September 2017 from http://www.tandfonline.com/doi/abs/10.1080/20430795.2017.1331118.

[4] James Weber, "Understanding the Millennials' Integrated Ethical Decision-Making Process: Assessing the Relationship Between Personal Values and Cognitive Moral Reasoning," Business and Society, Accessed September 2017 from http://journals.sagepub.com/doi/abs/10.1177/0007650317726985.

[5] Chris Ailman, Michelle Edkins, Kristi Mitchem, Ted Eliopoulous, and Janine Guillot, "The Next Wave of ESG Integration: Lessons from Institutional Investors," Journal of Applied Corporate Finance, Accessed September 2017 from http://onlinelibrary.wiley.com/doi/10.1111/jacf.12231/full.

[6] Michael Laermann, "The Significance of ESG Ratings for Socially Responsible Investment Decisions: An Examination from a Market Perspective," Accessed September 2017 from https://ssrn.com/abstract=2873126.

Tags: ESG


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