What Type of ESG Investor are You?

MICUK 2020: The Covid-19 pandemic has thrown ESG investing into the spotlight, says Boring Money founder Holly Mackay. So what kind of ESG investor are you? 

Holly Black 16 November, 2020 | 12:41AM
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Holly Black: Welcome to the Morningstar Digital Investment Conference. I'm Holly Black and I'm joined by Holly Mackay. She is founder of Boring Money. Hello.

Holly Mackay: Hi, Holly.

Black: So, you've been surveying investors on their ESG investing preferences. And I was really surprised to see that 40% of people told you that the Covid pandemic has made them think more about investing sustainably. Why do you think that is?

Mackay: I think, Holly, there's two quite different things going on here. I think, first, there is just that moment of realization we've all had the world's gone to hell in a handcart, and we all sort of sat back and sort of reassessed, I guess, how we live our lives. So, I think there's that broader theme playing out. But actually, I think another driver which is really interesting is much more of a financial driver. And people have just looked at markets, at sectors which have done well, and we've started to see evidence more and more of sustainable funds sort of outperforming, about some sectors doing particularly well. So, I think it's been a sort of meeting of both this broader realization that the world is a bit broken, but also a broader realization that perhaps sustainability is not such a daft metric to include in broader financial considerations.

Black: Well, I think some of the controversies over the lockdown period with some companies, maybe Boohoo, for example, have hammered home really about the companies we use and the effect they're having on the world.

Mackay: I think that's definitely true, and we've seen with the more savvy retail investors, for a long time, they've understood the impact of governance, okay? So, anyone that's kind of remembers back to Enron or Carillion, or we could list all these examples, of people have understood the G bit generally. And just last year when we researched people, people in the UK specifically were less fussed about the S part of ESG. But again, that's changed this year. And when we surveyed people about what perhaps they would like to blacklist or what they'd like to actively support, we found companies like Boohoo and SportsDirect were actually more toxic with end investors this year than some of the oil companies, which have been the villains of the past. So, we've seen this sort of, I think, growing and perhaps broader interest in ESG as a series of inputs this year.

Black: Well, I suppose, evidence of that can be found in the fact that 4 in 10 people said they already hold at least one ethical or sustainable fund. That's creeping up it seems, that number. Why is that?

Mackay: I think it's definitely growing. In fact, I was just looking at some data out for October, the most popular sort of funds or investment trusts that have been bought, and I was interested to see in the ETFs, for example, the iShares Clean Energy ETF is on some platforms the second most traded ETF. So, again, it's those financial reasons I think driving some of this. I think investors are sitting there and making the connection between the wall of policy money that's going to be invested in this sort of type of product and actually going, well, that just makes sort of fundamentally financial sense. So, I think we're definitely seeing an increase in interest.

What I would say is, I think we're still mostly seeing interest at a thematic level that people are picking one or two funds which are of interest to them. We're yet to see that sort of wholesale shift to people saying I want to make sure that my entire portfolio is run according to amongst other things, a series of ESG inputs. So, we're still seeing, I think, higher reported ownership from investors, yes, but they're cherry picking still, Holly, where this is still very much a thematic play. I'd expect over the course of the next five years we will see a gradual progression away from people going, I'm going to pick one or two good things or one or two sustainable things in my portfolio and people will move more towards saying this is just a fundamentally sensible way to invest. I want it across my entire investment portfolio.

Black: Well, that leads us in nicely. You came up with six different profiles of different types of investor based on how into ESG they are, ranging from the pure returns people who don't really care at all to the eco warriors. And the most common profile was the moderate green. So, do you want to tell us a bit more about those investors?

Mackay: Yeah, kind of, no surprises there. I think I probably fall into this camp, Holly. I'd love to think that I was an eco warrior, but actually, I'm still a moderate green. And what people are basically saying is that, look, I – they're saying I do care. Of course, I care about returns. That is the primary reason I'm investing. I want my money to go up over the medium to long term, but I also like the idea that my money is doing some good and that it is backing sustainable companies.

I think what perhaps the industry, the asset management industry, can do more to address is I think people know that we're all on a journey. People know we're not going to get perfection in one year. So, this is about progression. It's about – I know it's not a very catchy marketing message, but I think it's just for the moderate greens it saying, we're on a journey and this year we're going to be a bit less bad than we were last year, and we're making gradual sort of steps towards this. It doesn't need to be super dramatic and exclude this and exclude that. It's just generally sort of on a trajectory to a more sustainable investment portfolio, and the majority of people that was by far and away the biggest cohort are happy with a narrative which says to them, this is not a big dramatic wholesale shift, but we are acknowledging these factors and we're taking small incremental steps to improve things.

Black: Holly, thank you so much for your time. For Morningstar, I'm Holly Black.

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Holly Black  is Senior Editor, Morningstar.co.uk