Clients Clamoring for ESG Investing Advice

Failure to talk about ESG risks alienating clients, who will be asking about these investments, according to a new survey from State Street

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Demand for environmental, social and governance focused investments are growing and along with it, increasing evidence that advisors who disregard that market do so at their own peril.

A new survey from State Street’s Center for Applied Research found that 50% of retail investors surveyed want their financial advisor to communicate more about ESG investing. They want to learn about ESG investing because they want to align their investments with their personal values, and there is growing evidence that in doing so their returns won’t suffer.

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“In the case of individual investors, our industry is falling behind in providing knowledge on this topic,” according to the State Street Center study, which surveyed 750 individual investors in 24 countries and nearly 600 institutional investors – both asset managers and asset owners – in 29 countries.

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The study found that 83% of individual investors did not get their knowledge of ESG from their financial advisors but from their own research or from family and friends. This clearly represents an opportunity for advisors.

“Our research suggests that advisors should expect an increasing number of their clients will be contacting them about ESG investing,” according to the study. "If advisors want to be able to respond to that interest, they need to have the requisite knowledge to do so.”

The survey found that 62% of investors who already invest in ESG-related assets – and 43% who don’t – plan to approach their advisor about ESG investing in the next 12 months. “This shows interest in ESG investing even by those not currently practicing it,” the study states. “There’s an opportunity for advisors who are willing to start the conversation.”

In addition, the study found there’s an opportunity even for advisors whose clients already invest in ESG-related assets, provided those advisors “have the requisite knowledge…. More than half of retail investors say ESG factors will be increasingly important to them in the next five years.”

Among the most important ESG factors that concern investors are climate change – half of those investors factor that into their investment decisions – and income equality and gender inequality – 42% do.

“They can use their portfolio allocation decisions to address these concerns, while at the same time target the achievement of their long-term investment objectives,” according to the report.

Financial advisors are not the only financial professionals in need of education and knowledge about ESG, according to the State Street report. Portfolio managers and analysts also need training to foster ESG integration into their financial analysis.

The ultimate goal of such training, according to the study, is to make portfolio managers and analysts, rather than a small group of ESG specialists, responsible for determining the material ESG factors and their potential impact on financial performance.

“ESG integration cannot be done when there is a sharp dividing line between the sector portfolio managers and analysis who are only held responsible for financial analysis, and a separate group of ESG analysts who handle proxy voting and attempt to influence the decisions of sector specialists. ... ESG needs to become part of the investment organization’s DNA.”

ESG integration also requires a longer time frame for investing – years, rather than months, to maximize performance, and that, in turn, requires long time frames to judge and reward the performance of portfolio managers and analysts.

The study found that 47% of asset owners and 43% of asset managers believe it takes five years or more for ESG-related assets to outperform, but only 10 to 20% of them use those long time frames to evaluate investment performance, according to the study.

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