Financial returns are the number one priority for investors, but they don’t necessarily see ESG practices and financial returns as a trade-off. Morgan Stanly, in it’s yearly survey among 2820 global investors, found that 80% of global respondents say that it is possible to balance financial gains with a focus on sustainability, and strong ESG practices can potentially lead to higher returns and make for better longer- term investments.
For the report, “Sustainable Signals”, Morgan Stanley surveyed over 2,800 investors with over $100,000 in investable assets across the U.S. (1025 respondents), UK, France, Germany, Switzerland (1002 respondents) and Japan (793 respondents).
Strong ESG practices maximizing financial returns
So, are returns and ESG practices trade-offs? The survey found that most investors don’t see a conflict between ESG and financial performance, with high levels of interest in sustainable investing persisting even as “maximizing financial returns” remains by far the most commonly indicated investment priority, cited by 90% of investors.
Moreover, even investors who are aware that their sustainable investments underperformed in the prior year reported an increased interest in sustainable investing, suggesting a long-term investment horizon for sustainability-focused investors, according to Morgan Stanley.
Additionally, around three quarters of investors agreed that “leading ESG practices can potentially lead to higher returns, and such companies may be better long-term investments.”
Sustainable portfolio allocations are rising
However, with returns and ESG practices not being trade-offs and with rising interest, just 14% of global respondents have over half of their portfolios allocated to sustainable options, and 8% note that they have no sustainable allocations at all.
That said, 54% of global respondents expect to increase their portfolio allocations to sustainable investments in the next year, suggesting growth opportunities for asset managers.
The report also examined the key drivers and barriers to sustainable investing, with investors citing inflation (56%), new climate science findings (53%) and financial performance (52%) as the top events that have changed their interest in sustainable investing.
A lack of transparency and trust in reported data (63%), and concerns about greenwashing (61%), as well as concerns about investment performance (61%) are the top factors preventing them from including sustainable investments in their portfolios.
Investors focus on carbon emissions
Investors appear uncertain on how to invest in social themes and favor environmental solutions when asked about specific and targeted investment objectives. Nearly 80% of global investors consider a company’s reporting on its carbon footprint and commitment to reduce greenhouse gas emissions when making a new investment. Yet this doesn’t necessarily imply that traditional energy companies are out of scope.
In fact, 51% would consider investing in traditional energy companies so long as they have ‘robust’ plans to reduce their emissions and address climate change. This holds true even for investors that are ‘very interested’ in sustainable investing (62%) and those who rate ‘climate action’ as a top investment interest (55%).
