By: Michelle Dunstan, Chief Responsibility Officer, Janus Henderson Investors

Responsible investing, or considering financially material Environmental, Social and Governance (ESG) factors in investing has reached an inflection point.  During the last few years, “ESG” has faced increased scrutiny, misunderstanding, and controversy enroute to becoming a political flashpoint in some parts of the world.  Despite this shifting narrative, governments across the globe continue to work toward solving key global issues with policies designed to mitigate emissions, improve water security and land use, enhance cybersecurity and more.  These efforts inevitably create headwinds and tailwinds for a wide range of stakeholders, underscoring the importance of integrating material factors into investment research to inform decisions.

At the core of ESG integration is the premise that understanding securities from a traditional fundamental analysis and an ESG financial materiality analysis provides a better, more complete perspective on the outlook of an issuer in terms of risk and return: its long-term cash flows, valuations, or discount rates.  If a development has the potential to impact the long-term performance of a publicly traded company, investors are best served by taking the time to understand it and evaluate how it might impact share or bond price movements going forward.  This research ultimately leads to better-informed investment decisions and risk management.

Despite this link to value creation, investor preferences continue to evolve – creating a ripple effect that promises to shape the road ahead for all stakeholders.  Following are three takeaways on investor preferences from Janus Henderson’s 2023 Investor Survey:  Insights for a Brighter Future that will shape the road ahead for ESG.

Gender Gap Emerges – According to the survey findings, 60% of female investors think incorporating environmental or social responsibility factors into their investments is important compared to 48% of men.  In light of recent research from McKinsey & Company revealing that total US household financial assets controlled by women is expected to grow from $10 trillion today to $30 trillion by 2030, the future of responsible investing will likely look very different in the future than it does today.  As wealth shifts into the hands of US women over the next decade, asset managers and wealth management firms will adapt to better meet the unique preferences and investment objectives of female investors. 

Knowledge Matters –Notably, our survey also revealed that investors working with a financial advisor are more likely to think incorporating environmental or social responsibility factors into their investments is important (60%) than those who do not have a financial advisor (43%).  Given the pace of product development and the uptick in green-washing accusations, it’s not surprising that investors with access to professional financial advice and education are more likely to have a favorable view of the investment strategy.  This finding also speaks to the importance of asset managers working in partnership with advisors to deliver both well-crafted investment solutions that deliver on both financial and other goals and practical educational content to enhance the due diligence process.

Generational Divides – Finally, our survey also found that the majority of millennials (82%) and members of Gen X (66%) believe incorporating environmental or social responsibility factors into their investments is important compared to 41% of Baby Boomers and 36% of the Silent Generation.  Given this strong correlation between age and views on ESG investing, it appears recent backlash may one day be looked back on as a temporary setback.  Study after study has shown younger investors to be early adopters of responsible investing, and as these investors age and amass greater wealth, their influence will grow along with their imprint on the financial services industry – a trend that also suggests that ESG preferences will look very different in the next decade.

Responsible investing appears to have reached a crossroads in the US as an evolving regulatory landscape, coupled with political backlash, has elevated concerns surrounding the future.  However, as demonstrated by the Inflation Reduction Act of 2022, which sets aside over $300 billion for investments in clean energy and rules released by the Environmental Protection Agency (EPA) in 2024 that push the auto industry toward majority EV sales by early next decade, sweeping changes are underway that will have implications for publicly traded companies and their investors. 

These changes, coupled with demographic shifts impacting the future of wealth management, suggest the link between ESG integration, value creation, and shareholder demand will not be lost.