What is the Warm Glow Effect?

What is the Warm Glow Effect?

May 01, 2020

Hint, it's about

  • Increasing investment flows into funds that follow practices consistent with one's values
  • Which also increases the amount of satisfaction from the investment
  • And provides a goal to retain investment for the future.

The origins of responsible investing, also referred to as impact investing or sustainable investment, date back to the 1700s by groups, such as the Religious Society of Friends, also known as the Quakers, and other proponents, such as John Wesley. Original responsible investment approaches were primarily focused on excluding investments that weren’t aligned with the values of the investor. For example, a charitable endowment may want to exclude businesses that aren’t consistent with its underlying mission, such as firms that sell alcohol, firearms, and tobacco, which are occasionally referred to as sin industries. This exclusionary approach is often associated with socially responsible investing, or SRI.

Another form of responsible investing involves considering environmental, social, and governance, or ESG, factors as part of the investment process. Some examples of environmental factors include climate change, pollution, and deforestation. Social factors include working conditions, health, and safety. And governance factors include executive pay, lobbying, board diversity, and structure. While SRI tends to focus on excluding investments, ESG tends to be a more proactive approach, where the factors are integrated into the investment process, and the manager may seek out companies with various attributes.

During current crisis companies with higher environmental, social, and governance factors have outperformed the broad market, contradicting views that the trend is just a bull-market phenomenon. Sustainable ETFs added a net $7.8 billion in the first three months of 2020, or 40% of all equity ETF flows. ESG mutual funds had a net $2.7 billion of net inflows during the quarter, even as the broader equity mutual fund category had net outflows of $5.7 billion. The trend towards ESG is not unique to the US, investors worldwide choose to pour their money and support the Warm Glow effect.

For more information, read these article at Barron's, CNBC, Pensions and Investments, Morningstar.

As we continue to increase our offering of SRI/ESG investment options to our clients, we welcome your thoughts and questions about this growing opportunity to do good in the world.