Despite high overall industry growth rates and satisfaction scores for investors with sustainable investments, environmental, social and governance adoption among the financial advisor community has been slow.
State Street Global Advisors released a new report detailing how advisors can overcome the key challenges slowing the adoption of ESG investment strategies.
With 50% of ESG investors planning to increase the degree to which they incorporate ESG in their portfolio in the next three years, and 23% of non-ESG investors planning to add ESG, the report provides advisors with a clear path for overcoming three major hurdles.
ThinkAdvisor spoke with Brie Williams, head of practice management at State Street Global Advisors, about the report, Aim Higher: Helping Investors Move from Ambition to Action with ESG Investment Approaches, and the following three hurdles that she said are specific to the advisor community.
1. Confusion around investment performance parity.
The report clarifies that ESG is not just a “do good” mentality. Or as Williams told ThinkAdvisor, “this is an investment, not a donation.”
Rather, financial performance is what keeps clients interested and invested. The report states that 60% of ESG investors cite lower volatility and 54% cite lower downside risk as important reasons for incorporating ESG into their investment process, according to a 2016 State Street Center for Applied Research Survey of Retail Investors.
Industry and academic studies offer empirical evidence for better long-term risk-adjusted returns, lower downside and improved volatility in ESG strategies.
“There’s numerous data points — whether you look to academia or other investment studies that show there is performance here and it is not an either/or,” Williams said. “You don’t have to sacrifice returns. [ESG] actually has a role and a role that’s designed to help reduce risk as well as keep investors engaged for the long haul.”
According to the report, mutual funds and separately managed accounts classified as sustainable investments often meet or exceed broad market performance, both on an absolute and a risk-adjusted basis, across asset classes and over time.
2. Need for transparency and better data.
Better company data combined with better ESG research and analytics will lead to more advanced approaches to identifying and addressing material ESG issues, according to the report.
There has been significant progress in the number of companies disclosing ESG data, along with the breadth and depth of their data. However, as the report points out, reporting methodologies still vary among companies, index providers and asset managers, creating challenges for investors seeking to compare ESG strategies.