Why Are Advisors Reluctant to Hop on the ESG Train?

Of those who use ESG currently, 53% preferred ESG-specialized investment managers. Those advisors with RIAs or independent BDs largely preferred using a specialized manager as well.

That said, 47% of advisors surveyed were more interested in accessing ESG-oriented investments from broader-based asset managers that provided all strategies rather than ESG-focused managers. The study concluded that “this might reflect the greater access these providers may have to advisors, especially for those advisors already doing business with a certain firm. It might also reflect the depth of resources and capabilities broad-based firms can bring to advisors, especially related to mutual funds or ETF investing.”

4) Growth will come from users rather than non-users.

Seems like a no-brainer, but the study found that non-users, aside from a sudden rise in client demand, aren’t likely to change their ways. It’s more likely enthusiasts and current users will increase their usage of ESG than non-users becoming converts.

5) Performance isn’t a key reason for implementing ESG strategies.

Of advisors who use ESG strategies, 79% are very or somewhat satisfied with their performance, and see an “opportunity for improvement verses expectations.”  Non-users see an absence of “compelling performance-based rationale for using ESG.” Therefore, “business development rather than investment performance is the key driver of advisor use of ESG, with satisfying client demand the overwhelmingly predominant reason.”

Making the Case for ESG

With just about one in four advisors using ESG strategies, and only three in 10 users being enthusiasts, investment advisors seem reticent to come to the ESG party. With nine in 10 advisors “not fully engaged currently with ESG investing,” the strategy still has a ways to go within the investment advisory business. That said, 76% of advisors surveyed had some or a lot of familiarity with ESG investing, although 33% stated they do not consider ESG at all in managing assets.

The study also found ESG-using advisors place ESG investments in 15% of all or most client portfolios, while 44% use ESG in some client portfolios, and 40% use in only a few.

The main challenge for ESG investments — stated by 50% of advisors — seems to be lack of standards defining ESG or the absence of methodologies to assess solutions, followed by lack of investment choices, need for longer-term track record, and underperformance.

Another problem was where to find information on ESG investing. Twenty-five percent of advisors used third-party evaluation or rating services or independent research providers, while 20% used asset managers. Less than 15% used specialized ESG resources or their BD or custodian.

Other findings from advisor comments include:

• ESG users expect growing interest in this type of investing, especially from millennials and younger investors, but advisors desire more investment choices (especially in non-core categories such as alternatives and real estate), greater consistency in defining ESG (i.e. some ESG offerings include Exxon and Halliburton), and lower fees.

One advisor noted, “It’s my practice’s niche and I’m excited about the new products coming out, especially those that are low cost and passively managed.” However, another noted “I’m concerned that as more traditional wirehouses and broker-dealers start focusing on ESG solely to increase their assets, not because they believe in them, the ESG moniker will become diluted.”

• Most non-users are not very likely to recommend or use ESG strategies in the coming year, with RIAs seemingly having less interest and full service channel advisors relatively more willing.

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