“Retail investors don’t understand ESG investing—only 9% say that they have ESG-related investments, and the familiarity with the concept is not as high or as broad as some of the coverage on the topic of ESG investing might suggest,” says Gerri Walsh, president of the FINRA Investor Education Foundation, which conducted the retail investor survey with NORC of the University of Chicago.
Only 24% of the 1,228 investors surveyed could correctly define ESG investing, and just 21% knew what the letters in ESG stood for.
Walsh says the finding is “both surprising and concerning.”
“If people are going to be thinking about these issues, we need to make sure that investors understand what we’re talking about, especially retail investors,” she says. “We need to make sure that people understand the terminology that’s being used, and what’s behind ESG investing.”
Survey respondents indicated that financial factors are the most important consideration when making investment decisions, including whether an investment has the potential to earn high returns, the amount of risk it entails, and the associated fees. Environmental factors were the least important. ESG investors, however, are highly motivated by ESG factors, especially the environment, according to the survey.
Most non-ESG investors don’t hold ESG-specific investments because they are unfamiliar with the concept. “It just doesn’t occur to them,” Walsh says. “There’s an education gap and a knowledge gap about what ESG investing is.”
When it comes to ESG funds’ performance, a plurality (41%) of investors believe that returns for companies that prioritize their impact on the environment and society will be the same as the broader market while 14% expect ESG investments to outperform the market.
In 2021, sustainable index funds produced strong returns. According to Morningstar, the 13 ESG index funds available to U.S. investors that follow broad, diversified indexes of U.S. large-cap stocks posted gains ranging from 25.6% to 31.7%. Their average return was 29.2%. The S&P 500, represented by the iShares Core S&P 500 ETF (IVV), returned 28.7%.
The war in Ukraine and rising inflation have hit performance this year. For example, the Xtrackers S&P 500 ESG ETF (SNPE) and Xtrackers MSCI USA ESG Leaders Eq ETF (USSG) were top performers in 2021 with annual returns of 31.7% and 31.6%, respectively. This year, they are down 5.0% and 7.3%, respectively. The iShares Core S&P 500 ETF is down 5.5%.
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