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ESG Interest Is Surging. Where Are the Advisors?

By Marlene Satter

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Interest in environmental, social and governance investing is on the rise. Among advisors, not so much.

So says a new report from Cerulli Associates, U.S. Product Development 2018: Priorities for Active Managers, which says that while more investment products incorporating ESG factors are available and home offices have bought into the idea of ESG investing — even awareness in society at large about ESG factors is on the rise — actual investment in ESG products is trailing.

The reason, according to the report, “lies somewhere between the advisor and investor.”

“There are several factors at play to help explain why financial advisors have not wholeheartedly adopted ESG mutual funds and exchange-traded funds (ETFs),” Brendan Powers, senior analyst at Cerulli, says in the report.

Powers adds, “A sense that ESG strategies do not fit into client investment policy statements (26%), negative impact on investment performance (24%) and cost (19%) top advisors’ reasons to not use ESG strategies.”

Advisors themselves could also be part of the reason, since an aging pool of advisors — 36% of whom expect to retire in the next 10 years — are not exactly rushing to become experts in ESG investing, something they may not really understand, or in rethinking their existing investment strategies.

If asset managers take it upon themselves to “recruit” advisors by helping them understand how to incorporate ESG factors into client portfolios and to feel comfortable talking about them, that could lead to broader adoption of ESG investment products. In addition, managers will have to show advisors that ESG doesn’t mean lower returns; with new products developing track records, they need to demonstrate market-level returns.

“Data-driven educational material and more hands-on training will ultimately be what’s required,” Powers points out in the report, adding, “This effort will necessitate cooperation from asset managers supplying the product and their distribution partners (e.g., broker/dealer home offices, registered investment advisor custodians) that have built out the platforms for advisors to access the strategies.”

But that’s not all, he continues. “Moreover, the advisor should have the necessary training to break down complex investment products and help their clients understand them. Therefore, helping them apply these skills to talk about ESG strategies with their clients will be essential. Investor education should be a focus too, preferably through broader, more scalable digital marketing channels.”

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Marlene Satter

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