Institutional vs Retail Investors: Who’s driving ESG investment?

Institutional vs Retail Investors: Who’s driving ESG investment?

Compared to retail investors, institutional investors dominate sustainable and ESG-linked investing. Here’s what ESG-minded retail investors should know about institutional investors’ approach to ESG.

Gabe Rissman

Practice Management
March 29, 2023

Overall institutional investment is declining compared to retail investment. In 2021, retail investors held 52% of global assets under management, while institutional investors held 31%. According to current trends, the numbers could shift to 61% (retail investors) and 26% (institutional investors) by 2030. 

This shift in ratio could have significant impacts on a variety of existing investment trends, including ESG investing. Research suggests that institutional investors are more likely to invest sustainably and integrate ESG into their portfolios. We compare how these investor classes relate differently to sustainable and ESG investment considerations. 

Comparing retail and institutional investors

Institutional investors include pension funds, endowments, foundations, insurance companies, and sovereign funds with significant capital reserves pooled from different sources. They typically have minimum investment requirements of $200,000 or more. 

This gives institutional  access to a wider variety of financial investments along with research and insights than retail investors can access. It also makes them subject to more regulatory requirements. 

Retail investors are individual investors who invest in financial products for personal reasons such as retirement or wealth creation. They may invest using brokerage accounts and retirement accounts and they increasingly invest in alternative currencies and online trading platforms. Their approaches to investment can vary significantly depending on the individual. 

Institutional investors hold more shares sustainable assets than retail investors

In 2020, the Global Sustainable Investment Alliance found that institutional investors held 75% of global sustainable assets under management, while retail investors held 25%. 

Institutional Investors’ support more ESG proxy resolutions than general stakeholders

In 2021, public pension funds in the US supported ESG proxy resolutions at a rate of 90% compared to general stakeholders, which supported them only at a rate of only 68%, according to Morningstar

Institutional investors less likely to waver on sustainability in economic downturns 

A 2020 United Nations Principles of Responsible Investment (UN PRI) study found that retail investors withdrew investments from high-sustainability funds at a higher rate during the volatile COVID-19 economic period than institutional investors. 

Its research suggests that retail investors may see sustainable investments as a “non-essential good,” while institutional investors have to maintain their long-term ESG commitments. 

So, why are institutional investors more actively involved in ESG?

Given the higher percentage of institutional investors interested in ESG, it helps to understand why. The US SIF Foundation finds the top reasons for US institutional investors include “mission” for 71 of 86 asset managers and “fiduciary duty” for 50 of 86 asset managers surveyed with $1.26 trillion AUM and $1.16 trillion AUM, respectively. 

The same study found that climate change ranked highest in importance among ESG factors for investors with $3.4 trillion in AUM. The related issue of fossil fuel divestment ranked fourth in importance. Investors with $1.2 trillion AUM reported applying fossil fuel divestment screens in their portfolios. 

Still, both types of investors are interested in ESG investing

According to a recent study by the Chartered Financial Analyst (CFA) Institute, which surveyed over 4,400 investors across 15 global markets, “76% of institutional investors and 69% of retail investors have interest in ESG investing.” 

The CFA study shows neither group invests significantly in ESG-labeled products: 19% of institutional investors vs. 10% of retail investors. Yet, a Capital Group study found a far higher ratio of global institutional investors–63%--used ESG integration as an investing strategy in 2022. 

Institutional vs. Retail Investors’ motivations to invest sustainably

The CFA study details the differences in motivation for investor and retail investors. Risk-adjusted returns are more important for institutional investors while personal values alignment matters more for retail investors (see graph below).  

For investors focused more on values as a motivation for ESG investing, the majority of investors are willing to give up some return to meet the values objective: 73% of institutional investors and 67% of retail investors, reports the CFA Institute. 

Should retail investors follow institutional investors’ approach to ESG? 

Retail investors may not have the resources available to take the same sophisticated, research-intensive approach to ESG as institutional investors. Asset managers can help fill their knowledge gaps with improved insights. 

Our YourStake platform uses the following features to help asset managers align with clients’ value-based interests:

Using our platform, asset managers can apply a variety of screens and considerations for both financial and ESG preferences based on clients’ responses. 

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