What ESG Investing Means at Northwestern Mutual

More and more consumers want the businesses they support to not only provide great products or services, but to also be purpose driven.

According to recent research from Deloitte, 60 percent of consumers in the U.S. now say they prefer buying brands that aim to achieve positive outcomes for the environment, employees, and the global community. An astonishing 94 percent of Gen Z’ers (born between 1997-2012) surveyed expect companies to take a clear stand on important social issues. Broadly speaking, companies that effectively incorporate ESG (environmental, social and governance) principles into their business practices would be more appealing to this growing cohort of consumers.

People are expressing a preference for ESG companies in the dollars they spend, but when it comes to their investment dollars there are signs of a disconnect. Financial services and research provider Morningstar found that 1 in 3 investors who think corporate-level ESG principles are an important investment consideration have yet to incorporate ESG factors into their own investment portfolios — a so-called “do-should gap.”

We think there are a few reasons people have yet to include ESG in their financial plan, even though they believe it’s an important consideration for growing one’s wealth. Fortunately, there’s a straightforward solution to these common hang-ups.

What exactly is ESG investing?

ESG investing, as is often the case with financial products and services in general, can seem complicated at first glance.

ESG is still a young, but growing, investment focus. Because of that, the landscape is continually evolving. New funds, products and investment opportunities are springing up all the time, but which fits into your specific financial plan?

There is also no standard measurement for judging a company’s ESG bona fides. Research firms, such as MSCI, Moody’s or S&P Global Ratings, have emerged as go-to firms to corral data and identify companies that excel, or lag, in critical ESG categories. But there’s significant variance in the rating systems, which makes it difficult to compare apples to apples. What’s more, companies can choose what to disclose — or not disclose — to third parties. Recently, the SEC proposed rules to enhance and standardize climate-related disclosures to investors if they are “likely to have a material impact on their business, results of operations, or financial condition.” If finalized, this would mark the first mandatory disclosures required by the SEC.

At an even more basic level, a recent Gallup survey shows 64 percent of American consumers aren’t familiar with the term “ESG” in the first place, much less how it’s measured or implemented in an investment plan.

Do ESG investments perform?

Going another level up, investors who are familiar with ESG and are interested may not want to “rock the boat” with their portfolios. There’s concern that an ESG fund, or ESG-focused company, may underperform or expose a portfolio to different risks.

Of course, past performance is no indication of future returns, but studies have shown ESG investors aren’t sacrificing performance compared to a non-ESG index fund. In fact, they may even be getting a slight edge. A New York University meta-analysis of 1,000 research papers published from 2015-2020 on ESG investing performance found slightly higher stock returns — between 1.4 to 2.7 percent. In 58 percent of the studies analyzed, researchers found a positive association between ESG and financial performance, based on parameters such as return on equity or return on assets, compared to just 8 percent showing a negative relationship. To be fair, markets performed well from 2015-2020 and there’s no way to tell if that performance will persist through a recession or other market event.

But pure performance is one factor in an overall investment thesis. Feeling comfortable with the way you are growing your wealth is also critical as you’re more likely to stay in markets if your investments reflect both your financial and personal ambitions.

How do you implement ESG in a financial plan?

Lastly, some investors aren’t sure where to start. Should you buy a fund? Purge your portfolio of investments that score poorly on ESG metrics?

Fortunately, investors have a wide range of options to implement ESG into their existing portfolios. An integration approach considers ESG-related factors alongside traditional financial factors. An exclusionary approach keeps any companies that don’t meet ESG criteria out of a fund or investment strategy. There are also ESG investing strategies that focus on themes, such as water, renewable energy, companies with women in leadership roles and more. Broadly speaking, there’s an approach to ESG that can fit most investor preferences.

An advisor can solve all three hang-ups

There’s a straightforward solution for all these hang-ups: Working with a financial advisor.

An advisor can take myriad financial products and fit them all together into a financial plan that’s relevant to your life, easy to understand and can more closely align your investments with the outcomes you hope to see.

If you’re interested in ESG investing but aren’t sure where to start, research shows the simple act of getting an appointment with your advisor on the calendar can powerful motivator to getting it done. Building wealth in a way that aligns with your values and financial goals doesn’t have to be difficult or intimidating.