Nearly half of UK IFAs believe that the biggest barrier to recommending ESG investment options is their clients’ lack of familiarity with the concept, according to a new study by Foresight, a leading independent infrastructure and private equity investment manager.
The research, conducted among over 100 IFAs, revealed that 43% see lack of familiarity as the biggest hurdle, which is significantly higher than the 29% who said so in 2020.
While it may seem that awareness of ESG in the retail investor space has diminished, it may be that advisers’ own understanding has improved to such an extent that they appreciate more fully the knowledge gaps among their clients. Nearly two in five (39%) this year also cite confusing terminology surrounding ESG investment as a barrier.
Evidence counters concerns over performance
However, a substantial minority of investors still question whether a focus on ESG harms investment performance, with 31% of IFAs referring to clients having concerns about performance in relation to ESG. Despite this, a majority (72%) of IFAs believe incorporating ESG considerations into investment strategies does not usually impact financial returns negatively though, with just 13% saying this is the case and 15% saying they do not know.
IFAs’ thinking on this is in line with several academic studies that have shown there can be a positive relationship between corporate ESG scores and financial performance. Similarly, funds with a commitment to ESG are outperforming non-ESG funds on a risk-adjusted basis. For example, a 2017 MSCI study showed that companies with stronger ESG profiles typically exhibited higher profitability, lower frequency of severe drawdowns and lower systematic risk.
Tools are needed to inform investors
This need for more information to help promote sustainable investing to clients is highlighted in Foresight’s research. Nearly half (45%) of IFAs say education sessions would encourage them to suggest ESG funds more frequently, followed by learning tools (40%), available case studies (32%) and testimonials (11%). Only 11% said none of the above would help
Mark Brennan, Partner at Foresight Capital Management, said: “As responsible investing increasingly becomes part of the mainstream, there is still much to do in terms of raising awareness and helping IFAs to educate and inform clients of the options available to them. At Foresight we pride ourselves on being a sustainability-led investment manager, and we are certainly prepared to take on responsibility in helping the investment industry to shape sustainable investing in the future.”
