It’s estimated that about $2.5 trillion in assets have some environmental, social and governance screening involved. So why aren’t investment advisors adopting ESG investing as quickly as the rest of the investment world?
Some reasons found in a recent survey by financial consultant Practical Perspectives include lack of interest by clients, lack of training and education, or lack of a compelling reason to use ESG products. One advisor called it “a fad.”
The firm surveyed more than 550 advisors, of whom 46% were affiliated with an independent broker-dealer, 30% were RIAs and 21% were with full-service broker-dealers. More than 50% had over 20 years of industry experience, and 47% were solo practitioners. Most advisors (65%) were 50 years or older.
Key conclusions of the study were:
1) There is a “clear distinction” between an “enthusiast” using ESG vs. typical users.
Researchers found that enthusiasts, which include roughly three in 10 advisors who use ESG, are those who actively promote ESG within a portfolio,and consider it “crucial to how they differentiate their practice and as a reflection of their personal beliefs.” Typical users don’t embrace ESG as a core philosophy, and usually only implement it to accommodate client demand.
It was found that four in 10 advisors have used ESG investing, including one in four that are current users. Further, full service broker-dealer advisors were the most familiar with ESG investing.
Users of ESG were younger, typically with 10 to 20 years of experience as an advisor, were part of a team, and had total AUM of $250 million or more.
2) Portfolio construction relies on third parties.
Most advisors who implement ESG into portfolios, even enthusiasts, are “heavily reliant” on packaged solutions, the study found. These include actively managed mutual funds or ETFs for the most part.
A small number — primarily a subset of enthusiasts — rely on individual securities when implementing ESG strategies. This suggests that most advisors leave screening of ESG to professional managers “who have resources and capabilities to oversee the specific criteria which relates to these factors.” This also suggests advisors are less “hands-on” with ESG investments.
3) Advisors are open to broad-based managers, but prefer ESG-focused managers.
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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