As the bull market flourished in 2021, many investors took a shine to investments that reflected their values.
Environmental, social and corporate governance — or ESG — investments attracted record levels of new assets. Last year, U.S. sustainable funds attracted almost $70 billion in 2021, a 35% increase over the previous 2020 high, according to Morningstar.
Yet despite record growth, ESG funds have not yet reached mass adoption, according to new research by Betterment. To find out who is and isn’t investing in ESG and why, the firm recently commissioned an online survey of 1,000 investors who hold taxable investments.
Who loves ESG investments, and who doesn’t
More than a quarter of respondents — 26% — said they currently own some kind of ESG-themed investment. Of those respondents, 59% have held those investments for more than a year.
Notably, the survey also found 80% of investors who hold ESG-themed investments also have money in cryptocurrencies.
ESG investors are more likely to belong to younger generations, with 54% of Gen Z and millennials holding these investments. That compares to 42% of boomers and 25% of Gen Xers.
Many respondents — 46% — said they have not sought ESG investments, but are interested in them.
Meanwhile, a majority of those who were not interested — 51% — said they do not feel they understand ESG investments well enough. Another 27% are concerned their returns may suffer if they invest in this area.
ESG versus crypto — a conflict of values?
Most survey respondents do not own crypto, 63%, versus 37% who said they do.
Meanwhile, 80% of those who hold ESG-themed investments also hold crypto investments. In comparison, just 22% of those without ESG-themed investments in their portfolio hold crypto.
Yet as cryptocurrencies gain adoption, that has led some to raise red flags about the energy consumption from their mining activity. Bitcoin mining alone has been estimated to consume more electricity than many countries, according to Betterment’s report. Because electricity is connected to fossil fuels, the energy used to mine crypto may potentially drive up greenhouse gas emissions.
The survey found 96% of ESG investors who are also invested in crypto are aware of those environmental concerns, while just half of non-ESG investors said the same.
Moreover, 76% of respondents said it was either very important or important for major cryptocurrencies to become more environmentally friendly.
“The industry itself is moving in a sustainable direction, in part because of all of the scrutiny and all of the investor sentiment around this,” said Raoul Bhavnani, chief communications officer at Betterment, citing Ethereum’s recent switch to a less energy intensive method to generate new coins.
Will market worries hurt ESG enthusiasm?
As markets drop, just how well investors perceive ESG funds as helping them reach their goals may be a factor as to whether they can sustain their recent growth.
When Betterment asked how willing survey respondents would be to sacrifice performance to achieve their ESG goals, 17% said they were very willing, 16% said they were willing and 25% said they were somewhat willing.
Meanwhile, 26% said they were not very willing and 16% said they were not willing at all.
The top hesitations investors cited with investing in ESG-based portfolios included whether it would reduce their returns, with 53%, followed by the impact the investment would have, 40%, or if it would have higher fees than other funds, 39%.
Separately, a recent Morning Consult survey found Americans are generally split on ESG and profitability. While 40% of investors surveyed indicated they prioritize profitability over social responsibility, 37% of respondents said the opposite.