ESG and other thematic investing strategies have potential roles to play in portfolio design beyond simply aligning clients’ investments with their values. Well over half of advisors report using thematic investing to add diversification. Given that ESG stocks tend to be less vulnerable to certain types of risk, they offer potential benefits from a diversification point of view. Advisors were also likely to use ESG and other thematic strategies for asset class-specific purposes, which makes sense as themed funds can help investors cut across sectors or more traditional groupings of stocks or bonds.
Nearly a third of advisors use thematic investing to generate alpha. This fact is noteworthy given the long-standing view that ESG investments generally underperform the market. However, recent analysis of 745 European-based ESG funds using data from Morningstar2 shows that this long-held belief may not be true. It would seem at least a third of advisors surveyed have already embraced the performance potential of thematic funds.