Socially responsible investing is a key focus of an increasing share of investors and their financial advisors but there is a risk that they are talking about different things.
Individuals’ understanding of what the term means varies due to poor definition according to University of Virginia Darden School of Business Professor Mary Margaret Frank.
In a technical note she highlights that socially responsible investing accounted for around U$2.71 trillion in AUM in 2007 but by 2014 that has skyrocketed to $21 trillion.
The rise has been driven by several factors including a greater focus on environmental, social and governance (ESG) investments from investors and corporate leaders.
But along with ‘socially responsible’ investing, people often use similar phrases that may not mean the same. These include ‘blended finance’, ‘ethical investing’, ‘green finance’, ‘impact investing’, ‘sustainable investing’ and ‘triple bottom line’.
“I call it the wild, wild west of finance. We don’t really know what to call it,” Professor Frank said. “You need to make sure when you talk to people that you ask them what they are talking about, because everybody in this space uses different definitions.”
While the US has the most funds domiciled, the percentage of ESG investments is higher in Europe, Canada, and Australia.
Millennials want it now but what about later?
Professor Frank also says that the strong interest in socially responsible investments among millennials may not endure.
She cites how the priorities of Baby Boomers changed as they transitioned from socially-conscious “hippies” to grown-ups with new responsibilities.
“One thing you have to think about is: Is this a sustainable phenomenon?” Frank said. “If this is only driven by young adults, will it sustain when they have pressures like putting children through college?”
She also says the investment industry must be aware of the ‘bootleggers’ who will likely try to take advantage of the demand for this type of investment.
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