Financial advisers have reported a huge upsurge in environmental, social and governance (ESG) investing among their clients over the past 12 months.
The 2021 Financial Adviser Survey, published today by leading fund data and technology group FE fundinfo, finds two thirds of advisers are now investing more of their clients’ money in dedicated ESG fund propositions compared to this time last year. Just 1% meanwhile said they are choosing to invest less into ESG options.
The research also reveals that this surge is largely being driven by end investors themselves. Whereas last year advisers believed early interest in ESG investment solutions was mainly being driven by a combination of both investor demand and ‘top-down’ institutional sales pressure, this year 73% of advisers report their clients are more interested in ESG investing compared to last year.
This demand is set to increase year on year as well, according to the advisers. More than three quarters (76%) believe their clients will have more than a quarter of their portfolios invested in ESG funds within the next 5 years.
Oliver Oehri, Co-head of FE fundinfo’s ESG Group, said:
“Despite the uncertainty and volatility that many investors will have faced over the past year in the wake of the Covid-19 pandemic, the interest and inflows of assets into ESG investment propositions has been truly staggering. We are now seeing a rapidly maturing market attracting a new and diverse range of ethically minded investors who are as conscious of the impacts of their investments as the returns they generate. This is an exciting opportunity for financial advisers, who as the FE fundinfo Financial Adviser survey shows, are taking proactive steps with their own investment propositions to capitalise on this surge in interest. Most encouragingly, advisers are viewing ESG investing as a long-term trend and are preparing themselves accordingly. With greater data provisions and clearer ratings systems in the market, the potential for further growth in the years to come is huge.”
Meeting the demand
To meet this demand, advisers are increasingly looking at their own client offerings. Nearly two thirds (65%) said they have a dedicated ESG proposition already in place, while a further 26% are planning to introduce one shortly. Of those who do offer ESG financial advice to their clients, just over a quarter (26%) say their propositions have been custom built, while a further 24% outsource their ESG function to investment specialists.
Barriers to entry and different approaches to ESG investing
While the uptake and interest in ESG investing has been impressive over the past year, the research suggests it might have been even higher had there been agreements at policy level for advisers to understand and work towards. When asked to name the three biggest barriers preventing them from promoting ESG investing to their clients, 62% said the lack of a clear set of standards and definitions was the biggest issue, followed by a lack of readily available data solutions (52%) and the potential for ‘greenwashing’ (52%) whereby a company conveys false or misleading information about how environmentally or ethically sound their products or services are.
This lack of a single set of standards, taxonomy and data in the ESG space, as well as the fact ESG is still seen as a developing area of the market, has led to many advisers adopting different approaches in terms of the due diligence they carry out on ESG funds. A majority (62%) said they use screening tools on investment planners, while slightly more than half said they review an individual fund’s documents. Nearly a third meanwhile (29%) said they review a fund’s holdings at base level.
Rob Gleeson, Chief Investments Officer at FE Investments, said:
“‘ESG’ as a term on its own is not particularly helpful for either advisers or clients. It has broadly been spoken about from an institutional point of view as a catch-all solution to a complex problem. Retail investors and adviser clients don’t tend to think along the lines of whether their portfolios are ‘ESG portfolios’, but rather that their investments are not doing any harm and that they align with their own values. These are subjective decisions which advisers will have to get to the heart of and they will need to understand the range of suitable services within the market to meet their clients’ needs.”