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Aite Warns Wealth Managers: Embrace ESG or Lose Market Share

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What You Need to Know

  • Investments in sustainable assets have soared, totalling $45 trillion globally.
  • Aite Group expects the momentum to continue due to investor demand, performance, and more disclosure and data.
  • There are several tools that can help.

Research and advisory firm Aite Group has a warning for wealth management firms that fail to focus on sustainability in their client investments: You will lose market share.

In a wide-ranging report on ESG integration, based on in-depth interviews with executives from 14 firms — global wealth managers, ratings agencies and private banking providers, as well as specialized data providers, senior analyst Wally Okby discusses the growing market for sustainable investing and what wealth managers and financial advisors can expect in the future.

Sustainable Investment Assets Are Growing

Sustainable assets totaled about $45 trillion globally in 2020, about eight times their size in  2012, according to Aite Group, which found that more than one-third of those assets are based in the U.S.

According to U.S. SIF, sustainable assets in the U.S. totaled $17.1 trillion in 2019, almost twice those in 2016, and more than one-quarter of those assets (27%) were managed by wealth managers on behalf of U.S. investors.

Among 31 global wealth managers surveyed by Aite in May 2020, 44% reported an increase in client demand for ESG assets, led by U.S. and Canadian wealth managers. The COVID-19 pandemic contributed to that demand, acting “as a strong impetus to invest better,” according to Aite.

Another measure of growing retail demand for sustainable assets: $1.65 trillion in sustainable assets held by U.S. mutual fund and ETF assets as of year-end 2020 — 67% more than the total at year-end 2019, according to Morningstar.

What’s Driving the Growth

Aite Group expects the momentum for sustainable assets to continue because of growing demand from investors, driven in part by many studies that companies managed with sustainability in mind as well as mutual funds and ETFs that invest more heavily in such companies, perform better.

Its growth forecast is also based on ecological challenges and social crises that attract sustainable and impact investing, the Green Deal in the European Union along with new rules for wealth managers and businesses there, the U.S rejoining the Paris Climate Accord and the Biden administration’s reversal of policies that impeded sustainable investments in private retirement plans.

“With the United States back in the game, governments and the private sector are poised to do their best to support solutions to existential problems such as climate change, food insecurity and poverty,” according to Aite.

Along with this growing momentum in favor of sustainable investing, Aite forecasts a bigger push for more data that can gauge, quantify and measure the impact of these investments for sustainability beyond the information currently available.

Sustainability Data Providers and Advisors’ Desktops

Aite reports that about 50 ratings agencies globally score companies for environmental, social and governance (ESG) factors, but their ratings for the same companies often differ along with the level and types of disclosure among companies.

Aite expects the engagement of wealth managers with ratings agencies on sustainability issues will lead to consolidation among ratings firms, which will deepen the remaining agencies’ power and influence over the sustainable investing market.

In addition, Aite forecasts a bigger role for data providers using artificial intelligence (AI) and machine learning to focus on ESG issues, such as Truvalue Labs, acquired by FactSet late last year, and Clarity AI, which recently received an equity investment from BlackRock. The asset manager, the world’s largest, plans to integrate Clarity AI’s capabilities and data into its Aladdin platform.

This growing momentum for ESG data availability coupled with increasing investor demand for sustainable investments will push more data and monitoring of sustainability investments onto advisor desktops, according to Aite.

The Changing Regulatory Environment

Another push for sustainable investing, according to Aite, will come from changing regulations, starting in Europe. On March 10, 2021, the EU’s MiFID II framework begins to take effect (it will be phased in), requiring investment managers and advisors consider and disclose sustainability risks alongside other financial risks to investors.

Funds that claim to have impact on ESG goals will have to show evidence of those sustainability efforts, and funds that choose not to take sustainability risks into account when making their investment decisions will be required to provide clear reasons for that decision.

Publicly traded companies in the EU with more than 500 employees are already required to publish reports on their policies in relation to environmental protection, social responsibility and treatment of employees, respect for human rights, anti-corruption and bribery, and diversity on company boards.

Starting in 2022, investment managers in the U.K. will be required to issue climate-related disclosures.

Okby expects the U.S. will soon follow the EU, issuing ESG reporting requirements for asset managers.

Sustainable Analytics Providers for Wealth Managers

In his report, Okby highlights several U.S.-based providers of sustainable analytics that wealth managers can use to embed sustainability data and metrics into investment portfolios, and train financial advisors to enable conversations with clients on ESG issues.

Fidelity Investments’ ESG Pro, released in January, combines traditional and ESG data in the same interface to help advisors build and adjust customized ESG portfolios and engage with clients through its Values Discovery Quiz.

First Affirmative Financial Network provides its members with customizable ESG portfolios that they can design with its advanced portfolio construction engine or through its multi-manager and managed mutual fund solutions.

Morgan Stanley’s Impact Quotient is a “best-in-breed” application that is a core component of the firm’s Advisor Desktop client reporting application, which includes a client’s impact profile as well as analysis for single securities, mutual funds, ETFs and SMAs.

The firm is working to integrate IQ data and analytics into complementary proprietary applications that financial advisors can use at “every point in their client relationships,” according to Aite.

Lessons for Wealth Management Firms

The Aite report finds that financial institutions “that provide complete and far-reaching ESG offerings will come out ahead of their peers for years to come.”

As for individual advisors, Ogby cautions: “If you’re not already investing sustainably for clients,  consider it. And if you’re not going to consider it, you better have a reason why you’re not going to. It’s not just the future. It’s already here.”

(Image: Shutterstock)