What the Growth of ESG Investing Means for Advisors

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Record flows to ESG funds means that advisors will have access to better tools to analyze product effectiveness and will be able to construct customized solutions for their clients.

ESG investing is the hottest trend in asset management. Despite YTD fund outflows of $167 billion for all funds and ETFs, ESG-related funds saw record-setting inflows of almost $21 billion (through June 30), nearly matching their total 2019 fund flows of $21.4 billion.1 In 2019 alone, total ESG fund flows were four-times higher than the previous calendar year record.2

Investors’ embrace of ESG investing is also getting the attention of companies and regulators. In August 2019, the Business Roundtable announced a new, expanded “Statement on the Purpose of a Corporation,” committing its companies to benefitting all stakeholders and not just shareholders. It was signed by 181 CEOs, many representing some of the largest companies in the world. Whether this commitment is little more than mere virtue-signaling or a genuine commitment remains to be seen. But regardless of motivation, it’s clear that companies are paying attention to the demands of their investor base.

The parabolic rise in ESG investing has met regulatory resistance from the Trump Administration by way of the US Department of Labor (DOL). In June, the DOL proposed a new rule stating plan fiduciaries may not invest in ESG vehicles if the strategy subordinates returns or increases risk for the purpose of “non-financial objectives.” The proposed rule, combined with recent enforcement activity, suggests there’s skepticism and hostility inside the administration and DOL regarding ERISA plan investments in ESG funds. Notably, there were nearly 1,500 comments provided to the DOL during its uncharacteristically short 30-day comment period. Comments on the proposed rule – which came from a wide variety of asset managers, pension funds, investor groups, and others – were overwhelmingly negative and opposed to the rule.