Wealthy U.S. investors, particularly those with an eye to passing their riches to the next generation, are stepping up their commitment to sustainable investing, says Cerulli Associates.
In a new report, the Boston-based research firm says that the demand for investments that consider environmental, social and governance (ESG) criteria is gaining traction with U.S. high-net-worth (HNW) investors.
In particular, it reports that 58% of HNW advisory practices are planning to increase their ESG allocations in the year ahead.
“The concept behind ESG resonates with HNW investors due to their comfort levels in investing in innovative areas that provide impact and because of their deliberate focus on sustaining and protecting their wealth,” said Asher Cheses, research analyst at Cerulli, in a statement.
At the same time, Cerulli says that the number of HNW advisors that use ESG is set to increase in the years ahead, as younger investors, with a greater focus on sustainable investing, receive intergenerational wealth transfers.
“As next-gen investors begin to inherit wealth and become more involved in their families’ investment decision-making processes, their interest in socially responsible investments presents a significant opportunity for the emergence of ESG strategies,” said Chayce Horton, analyst at Cerulli, in a statement.
Additionally, Cerulli said that ESG investing by HNW investors is expanding beyond screening out certain investments — such as companies that deal in tobacco or weapons — to a wider variety of strategies, including impact investing.
As the ESG trend continues, it will become increasingly important for advisors to understand clients’ motivations, Cerulli said.
It reports that its latest survey finds that the environmental concerns are cited as the top driver of ESG investing (69%), followed by a desire to make an impact (54%) and ethical concerns (52%).
Obstacles to growing sustainable investment include a concern that ESG strategies don’t fit into clients’ investment policies, higher costs, the challenge of measuring impact, and a lack of track record for ESG investments
“Given that ESG is still in the early stages of development, there is a lack of available data and standardization in measuring an ESG strategy’s effectiveness,” said Cheses. “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.”