Vast Majority Of Investors Are Willing To Sacrifice Returns For ESG Goals

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For years now, companies have been paying special attention to environmental, social, and corporate governance — or ESG — issues. At this point, anyone with an interest in finance has become familiar with the ESG concept.

More recently, though, even those ignorant of the world of finance have been introduced to ESG. A few politicians on the right (most notably Ron DeSantis and Vivek Ramaswamy) have taken shots at ESG by labelling it as a form of “woke investing” or “woke capitalism.”

It is unclear what constituency these attacks are supposed to speak to. Although some gelatinous-spined corporations have indeed backtracked in response to the right-wing war on wokeness, even GOP primary voters say they’d prefer the government butt out of telling corporations what causes they can and cannot support.

Beyond the Republican voting base, investors in general are increasingly, and overwhelmingly, supportive of ESG goals. This is particularly true among younger investors.

U.S. Bank recently surveyed approximately 4,000 current and aspiring investors and found that a majority of investors across age groups would be willing to underperform the market in order to invest in companies aligned with their belief systems. More than 80 per cent of Gen Z and millennial investors said they would accept returns lower than the S&P 500’s 12 per cent 10-year average return if they could invest in accordance with their belief systems. Smaller proportions of Gen X and boomer investors said the same: 73 per cent and 65 per cent, respectively.

There was a disconnect in the survey between a passive willingness to accept lower returns in service of ideology versus actively striving to invest in socially conscious companies. Less than a third of boomers said they want to allocate their investment portfolios so as to support causes they care about, compared to 45 per cent of Gen Xers, 59 per cent of millennials, and close to two-thirds of Gen Z investors.

Of course, “causes you care about” doesn’t necessarily mean ESG, but there are many signs that at least for most younger investors, these ideas are one and the same. There are also a lot of signs that an ESG focus doesn’t necessarily mean an investor will sacrifice anything, as considering environmental, social, and governance issues largely seems healthy for companies.

In one embarrassing counterexample, Strive Asset Management, the fund manager founded by Republican primary candidate Vivek Ramaswamy specifically to fight “woke capitalism,” has performed poorly. Strive’s inaugural fund, which was custom-designed to push back against ESG investing, has been absolutely crushed by the S&P 500 ESG index, underperforming its “woke” counterpart by almost 19 percentage points year-to-date (as of Aug.31).

ESG metrics are even increasingly being used to determine executive compensation. Corporate filings show that last year, 20 per cent of the metrics in executive pay plans related to ESG outcomes. While this was dwarfed by the proportion of business and profitability metrics (46 percent), the year-to-year trend is clear: Companies are more heavily weighting ESG objectives in holding their leaders accountable.

ESG is not a panacea, and slapping the ESG label on something without taking real, substantive action obviously won’t help anything. That being said, all the evidence points to ESG becoming more popular, more important, and more visible in boardrooms across the country.

Despite what you might hear from the GOP debate stage, investors are demanding more than just the highest returns possible from the companies they support, and corporate leaders are listening. Especially as younger and more socially conscious investors accumulate capital, and as older more profit-orientated investors age out of the market, ESG is going to continue to be prioritized.