A substantial majority of financial advisers and discretionary fund managers (DFMs) have bought into the broad concept of ESG investing, but confusion remains over terminology, research and processes, according to a survey from the Association of Investment Companies (AIC).
Nearly nine-tenths of financial advisers (89%) expect demand for ESG investments to increase over the next 12 months. Only 2% thought it would decrease slightly and not a single respondent said it would decrease significantly.
The vast majority of financial advisers are interested in ESG investing and have already begun researching it, with 23% of financial advisers considering themselves early adopters and a further 48% stating that they had recently become more knowledgeable about it. Among DFMs, these figures were higher, 34% and 51% respectively. Only 3% of financial advisers and 5% of DFMs said that ESG investing was not of great interest to them.
Personal experience of ESG investing among financial advisers and DFMs
|I would consider myself an early adopter of ESG investing and have been researching this area / discussing ESG investments with clients for some years now
|I have recently become more knowledgeable about ESG investing and how to make this part of the offering to clients
|I have recently become interested in ESG investing and have started to research this area
|I have not thought about ESG investing too much but am planning to start researching in the future
|ESG investing is not of great interest to me
Source: AIC/Research in Finance. Percentages are % of respondents who agreed with each statement. Respondents could select only one statement.
The majority of financial advisers have bought into the concept of ESG investing, with nearly four in five (79%) agreeing that investments should make a positive difference as well as a financial return. Most advisers also agreed with the statements that ESG investing will have a positive impact on the environment (69% agreed) and a positive impact on society (60% agreed). These figures were similar among DFMs.
Most firms are now offering an ESG investment proposition: 74% of financial advisers and 86% of DFMs said their firms already offered one, while a further 23% and 14% respectively said their firms were looking to do so in future.
ESG and performance: “Not a conversation around compromise anymore”
The AIC research shows the view that ESG investing could mean worse performance has been largely quashed by good returns from ESG funds in recent years, though a minority still think it might hit investors in the pocket at some point.
Among financial advisers, 40% said that ESG investing is likely to lead to better performance, with only 14% feeling it would lead to worse performance. Those numbers were 56% and 18% among DFMs.
One adviser commented: “ESG portfolios stood up probably better than non-ESG portfolios through last year. So it’s not really a conversation around compromise anymore. It’s very much about thinking positively about investing like that. So, do you want to save the planet or not? Do you want businesses to be run more socially and ethically in a responsible way? It’s all-encompassing, that sort of stuff. It’s just how we should be investing our money.”
But ESG could mean higher charges
However, views on charges were more negative, with 42% of advisers and 49% of DFMs expecting ESG investing to mean higher charges, and only 1% and 5% respectively thinking it would mean lower charges.
Related to this, advisers are still not wholly convinced by the idea of passive funds for ESG. A majority (62%) agreed that ESG investing is better suited to active funds, and less than half (42%) agreed that ESG investing could be achieved through passive funds. DFMs strongly prefer active options, with 80% agreeing that ESG investing is better suited to active funds.
When it comes to risk, the largest share of respondents (55% of financial advisers and 40% of DFMs) believed that ESG investing would have no overall impact on risk. However, about a third of both financial advisers (33%) and DFMs (31%) worry that ESG investing will mean higher risk.
Some financial advisers cited the extra volatility they associate with ESG funds because of their narrowed universe. An additional concern is that ESG investing doesn’t always fit well with the risk-managed approach to building portfolios that the typical advisory firm adopts.
One financial adviser said: “If you strip out large sector areas you can essentially increase the risk, the volatility. One of the big drivers, quite rightly, from the regulator is assessing people’s risk and making sure that the investments that you have fit within that and then other things come secondary to that. How do I protect myself and my company and my other clients that I look after if this thing loses 30% or 40% in a heartbeat? The client says, well, yes, I know I said I wanted that positive impact thing and all of that, but I didn’t want to lose 20% or 30% in a week, and now I have.”
Knowledge gaps and confusion: “An absolute rabbit hole”
Although most financial advisers show positive sentiment towards ESG investing in general, they do not rate their knowledge of ESG highly. On a scale of 1 to 5, financial advisers rated their knowledge level as 3.0. Knowledge of impact investing was slightly lower at 2.7.
Among those advisers with a lower level of knowledge, there was uncertainty about ESG terminology and the different types of ESG fund. The fact that some ESG funds invest in the likes of oil companies was a further source of confusion. These advisers can feel overwhelmed by the topic and crave simplicity and standardisation, the research found.
One adviser said: “I’ve sat through various ESG webinars, and in all honesty, some of it is the jargon, the names for different things, I almost haven’t heard it enough times for the main words to resonate.”
Advisers and DFMs who are more knowledgeable about ESG still admit to knowledge gaps and areas of confusion. These include uncertainty over what ESG funds are available to them and how to measure funds’ ESG credentials. When it comes to client conversations about ESG, some are more comfortable with the topic than others.
A DFM commented: “The portfolio managing is pretty much the easy bit as far as we’re concerned. It’s actually gauging what clients’ expectations and preferences are in that space, which is probably the harder conversation because the whole topic is so diverse and you can go down an absolute rabbit hole.”
The difficulty of researching ESG investments is a problem among both advisers and DFMs. A majority of advisers (58%) and DFMs (55%) agreed with the statement “I am supportive of ESG, but I find it hard to research investments’ ESG policies and credentials.” Even among those who described themselves as early adopters of ESG, 47% agreed with this statement.
A financial adviser who was an early adopter of ESG investing said: “More of an understanding of certain ESG standards that the fund managers look for in companies before they invest would be helpful. What questions do they ask the directors and managers of companies in order for them to say, right, this is a company that meets the standards we are happy with?”
AIC comment on the research
Nick Britton, Head of Intermediary Communications at the Association of Investment Companies (AIC), said: “Our research shows that scepticism around the whole concept of ESG investing is now fairly rare among advisers. However, the fog of jargon and competing metrics and standards is confusing even for those who regard themselves as knowledgeable on the subject.
“The issue of performance is also crucial. The fact that various ESG investment approaches have performed well in recent years has shaped advisers’ attitudes, but of course, this isn’t guaranteed to continue in future.
“In the investment company world, we’ve seen companies with strong ESG credentials in high demand. Our renewable energy infrastructure sector, for example, has raised over £2.5 billion so far this year, helping to drive record fundraising for investment companies overall. Investment companies’ ability to invest in a wider range of assets, including unquoted impact investments, makes them attractive to investors who want their investments to do good and see that impact being measured and reported.”