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Advisors on ESG Investing: We Need Better Data

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Investors are more interested than ever in how publicly traded companies handle environmental, social and governance issues, but many say they lack the information to make ESG investment decisions and their advisors often offer little help.

Those are some of the major findings of a new Natixis survey on ESG investment issues, which essentially combines the results of four previous global surveys of close to 12,500 individual investors, financial professionals, institutional investors and professional fund buyers. About 12.5% of those surveyed are from North America, primarily the U.S.

An ESG Information Gap

Three-quarters of individual investors worldwide — and 71% in the U.S. — say it’s important to align their investments with their personal values and ethics. About 50% say they do just that,  but only about half say they have the information needed to choose those investments.

An even greater percentage of financial advisors — 68% globally and 62% in the U.S. — say they would be more likely to recommend ESG products to clients if there were better data and reporting on these investments. Even more U.S. advisors, 71%, worry that investments labeled “green” are not genuinely sustainable investments, and 73% say the diversity of ESG strategies is improving.

Despite the reportedly growing interest in ESG investments among retail investors, less than 30% of U.S. advisors say their clients are asking about such investments and only 32% say more clients are asking more about ESG investments now than they did a year ago. Moreover, just 17% of U.S. advisors say they need to improve their ability to understand ESG and explain it to clients. “Advisors may be slow to recognize an important investment trend,” according to the report.  

“Many advisors in the U.S. actually have a limited view of what ESG investing means … Financial intermediaries themselves need a better, clearer understanding ESG.”

The report notes that “it appears that ESG should be a central point in the investment discussions across the globe, but a deeper look at the challenges identifies an information gap that may be impeding more widespread adoption.”

Institutional Investors in the Lead on ESG

Institutional investors seem to be taking the lead on ESG strategies. Sixty-one percent globally report they currently use ESG strategies within their portfolios and 56% believe alpha can be found in them. (Fifty-nine percent of advisors globally believe ESG strategies provide alpha.)

Fifty-five percent of institutional investors plan to increase their ESG allocation in 2019, and 65% believe incorporating ESG into their strategies will become standard practice for all managers within five years. Close to half (43%) say that including ESG factors in their process is as important as fundamental analysis. Close to 40% say ESG investments minimize headline risks (38%) and 20% expect they will produce higher risk-adjusted returns over the long term.

Despite these results, institutional investors, like advisors and individual investors, also see a need for more information about ESG investing. Close to half (43%) cite the lack of established track record and the difficulty to measure performance.

The Effort Needed to Boost ESG Adoption

The report concludes that a “concentrated effort” is needed among institutional and individual investors, advisors and asset managers to achieve greater acceptance of ESG strategies, one that focuses on three goals:

  • Enabling investors to align their assets with their personal values. Advisors need better education and training on ESG strategies that can help clients realize this goal, whether it be values alignment, better risk management or influencing corporate behavior. Advisors should also actively listen for how investors express this preference and what they want to accomplish with their money.
  • Making ESG part of the investment performance discussion. Asset managers who promote ESG investments should report not only on their investment performance but on how well their funds have delivered on ESG goals. For example, can they demonstrate that their integration strategy has enhanced risk-adjusted returns? Or can they demonstrate that their screening process has either helped them avoid bad risks or helped them capitalize on top performers?
  • Providing clearer definitions of what is meant by ESG. A consistent terminology on ESG, such as the taxonomy that the EU Technical Expert Group on Sustainable Finance is expected to propose in June, is needed. Also needed are clear standards that identify which strategies will help investors achieve which motives as well as standardized reporting on which investments help investors achieve which goals.

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