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As more advisors integrate impact investing into their practices, a recent Cerulli Associates study found that 58% of high net worth practices currently use environmental, social governance/socially responsible investing and plan to increase their allocations over the next 12 months. That said, 20% stated they don't use ESG/SRI and have no plans to going forward.
The most important reasons for using ESG/SRI, according to the survey, include environmental concerns (69%), desire to make an impact with their wealth (54%), and ethical concerns (52%). The study also found that 22% of HNW practices using ESG states clients also want sustainable returns.
"HNW investors are starting to realize that investing for financial return and investing to make an impact are not mutually exclusive," according to Asher Cheses, a research analyst with Cerulli.
Cheses also noted that HNW and multi-family offices are set up to pass down wealth across multiple generations. While many may have started with negative/exclusionary screening (e.g. tobacco, weapons) they have evolved into using more integrative strategies.
Although the survey found a steady increase in ESG/SRI investing, 55% of respondents said key inhibitors to using these strategies across all portfolios was it did not fit into client investment policy statements. Other factors for the reticence in using ESG/SRI include high cost (40%), difficulties in measuring impact (40%) and lack of track record/performance (30%).
"Given that ESG is still in early stages of development, there is a lack of available data and standardization in measuring an ESG strategy's effectiveness," Cheses said. "Therefore, conducting proper due diligence and accurately measuring the environmental and social impact of these investments has remained a significant challenge for HNW practices exploring the ESG space."
Managers need to help educate investors in this style of investing, the study noted, especially as the next generation of wealthy investors will drive the appetite for ESG solutions.
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Ginger Szala
Ginger Szala is executive managing editor of Investment Advisor magazine. She covered the financial business and alternatives industry for 30 years while editor of Futures Magazine Group. MSJ Northwestern, BA University of Wisconsin-Madison. She is based in Chicago. Go Blackhawks!
