Featured in FundFire: HNW Investors Skeptical of ESG Despite Huge Marketing Push

Article published on January 27, 2016  
By Danielle Verbrigghe 

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Many top brokerages, asset managers and banks have ramped up the focus on promoting socially responsible and impact investing programs and products. But some high-net-worth and institutional investors still remain skeptical of the merit of such investment concepts, studies show. 

"A lot of the banks and brokerages are definitely putting a lot of money and thought and resources into marketing and positioning themselves in the broadly defined world of responsible investing," says William Burckart, founder and CEO of Burckart Consulting. Part of what is driving the profusion of marketing and public relations campaigns are firms’ desire to tap into what they view as a big future opportunity driven by growing investor interest, he says.

Promoting such programs through marketing and public relations could also present an opportunity for firms to repair some of the public trust that the industry lost during the scandals arising during and after the financial crisis, he says. 

"Impact investment, because it is inherently about achieving these positive social and environmental and governance outcomes in the world begins to project a different narrative about the role of finance and the role of investment in the world," Burckart says. "It starts in some ways to get folks to reconsider trust in financial institutions."

While assets in impact investments, or investments made with the intention of generating social and environmental impact alongside financial return, have already grown, the level of product development and marketing activity taking place across the industry indicates the level of ambition firms have in this space, Burckart says. 

"The market is a largely aspirational market, not an actual market," Burckart says.

A study last year from the Global Impact Investing Network and J.P. Morgan found that a sample of 145 fund managers and asset owners surveyed managed $60 billion in total impact investments, defined as financial investments intending to generate social and environmental impact along with a financial return. Yet by a broader measure, at least $6.2 trillion was invested in asset management products or institutional strategies incorporating at least some environmental, social and governance (ESG) considerations in the United States as of the end of 2013, according to the Forum for Sustainable and Responsible Investment.

But surveys have shown that many investors remain skeptical about social responsibility and ESG claims made at a corporate level, and about the overall merit of such investments. 

A new survey of institutional investors globally by Natixis Global Asset Management found that 64% believe that ESG measures serve primarily as a marketing tool. While that question primarily reflects attitudes about ESG claims on a corporate level, the sense of skepticism could also be influencing attitudes about ESG-focused investment products. 

At some corporations, ESG and socially responsibility initiatives have historically appeared to be driven by communications departments, rather than being enacted as strategic initiatives at the corporate level, says Philippe Zaouati, CEO of Mirova, a Paris-based Natixis affiliate focused on responsible investing. This could be one factor driving the perception among some investors that ESG is primarily a marketing ploy. While the observation focuses on ESG implementation at the corporate level, the same concept could apply to some investment products, he says.

The study also found that while half of the institutional investors surveyed said they believe ESG investments could be a source of alpha, just 26% of those surveyed agreed that incorporating ESG into investment decision-making has a positive effect on their investment performance. 

Other surveys have also shown similar doubts from a segment of retail investors. In fact, 32% of retail investors surveyed by Spectrem Group last year said they believed claims of social responsibility are only a corporate marketing or public relations ploy. And wealthy investors were more likely than less affluent investors to be cynical about corporate motives, according to the survey. In fact 39% of investors with more than $5 million said they believed socially responsibility claims to be driven by public relations. And 57% of investors surveyed by Spectrum said that at the end of the day their investment objectives were purely financial.

A lot of the skepticism from investors is based on a lack of knowledge, consultants say.

One issue is the difficulty investors have in differentiating between quality impact investment products and those that just "check the box" on ESG to gather assets, says Burckart.

"The signal-to-noise ratio is extremely poor," Burckart says. "There’s a lot of competing signals and trying to educate yourself on what is quality versus what is potentially not has proven to be pretty difficult."

A lack of common language is also contributing to continued skepticism from investors, he says. 

Firms use terms like ESG, impact investing, socially responsible investing and values-based investing inconsistently. And the slew of terminology can confuse investors, he says. 

"Part of that is a lack of education," Burckart says. "Healthy skepticism is good, but here is a new world of opportunity, and it behooves investors to take a look," he says.

To that end, distributors such as wirehouses and other brokerages, and product manufacturers have focused on providing educational materials, as well as crafting marketing and public relations campaigns, to get the message out. 

Still, marketing efforts focused on responsible investing are unlikely to repair the reputational damage inflicted on the industry during the financial crisis, says Marcia Selz, president and chief research director at Marketing Matrix, a marketing consultancy focused on financial services.

"They might ratchet up a couple of points on brand image, but truly there’s such disbelief and distrust of these industries at this point in time that as of right now a few socially responsible programs are not going to greatly modify the brand image of this industry," Selz says. "Recovering the brand image of an industry is going to take more than socially responsible programs." Selz says. 

In part, that’s because the investing public understands that wealth and asset management firms, like the corporations they invest in, are primarily focused on financial results, rather than achieving social good, Selz says.

"I think the investing public recognizes that it’s not only altruistic motives that drive these programs," Selz says. "Banks and mutual fund groups and brokerage firms are getting on that bandwagon because they see opportunity there, not because they’re such fabulous corporate citizens."