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How to Bridge the ESG Divide Between Advisors, Clients

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What You Need to Know

  • A Cerulli Associates survey shows that up to twice as many investors as advisors are interested in ESG investing.
  • Advisors tend to restrict ESG investing to wealthier clients, which is a mistake, according to Cerulli.
  • Advisors also tend to favor the largest fund companies for ESG investments when other firms have more experience.

Despite increasing interest in investments focused on environmental, social and governance issues among investors, advisors and asset managers, many advisors are still reluctant to offer ESG strategies in client portfolios, according to a recent report from Cerulli Associates.

Fifty-eight percent of more than 1,000 advisors surveyed cited a lack of investor demand for their lack of ESG strategies, while 44% of 1,200 retail investor households surveyed said they preferred to invest in an environmentally or socially responsible way and 80% of investors reported a preference for investing in companies that are leaders in environmentally responsible practices.

The Cerulli survey also noted that advisors tend to limit ESG investing to their high-net-worth clients, which Cerulli defines as investors with more than $5 million in investable assets, leaving out the 56% of households with investable assets between $100,000 and $250,000 who said they would rather invest in companies that have a positive social or economic impact.

“In order for responsible investing to fully develop and grow in retail channels, advisors and asset managers must fully understand the appetite for ESG investing among retail investors. … Both asset and wealth managers should seek to make ESG investing more accessible across wealth tiers,” the report notes.

Advisors Favor Biggest Fund Managers for ESG Investments

When they do invest client assets in ESG investments, advisors tend to favor large asset management firms like Vanguard and BlackRock’s iShares division. When asked to rank the firms that had the best reputation for providing quality ESG offerings, about half the advisors surveyed selected Vanguard and 44% chose BlackRock/iShares, even though Vanguard has only five ESG funds available to U.S. investors and BlackRock has 28.

Moreover, only about 16% of advisors rated Calvert (now part of Eaton Vance, which has been acquired by Morgan Stanley) and Parnassus as having the best reputations for quality ESG offerings when the two firms have invested exclusively in sustainable investments since their beginnings, which date back to 1976 for Calvert and 1984 for Parnassus.

‘The reality is that, as in other cases when considering unfamiliar product types (e.g. active exchange-traded funds, alternatives), advisors often look to the largest, most established brand names as a proxy for quality,” according to the Cerulli report. Fees are also a factor for advisors and “the largest low-cost providers have gained a solid foothold with middle market and affluent investors,” according to Cerulli.

Advisors Need Help That Asset Managers Can Provide

“Advisors need help framing ESG investment decisions,” the Cerulli report notes.

Many advisors find it difficult to benchmark ESG strategies and define the boundaries of those strategies, and they lack the time and resources to do their own research into ESG strategies. On top of those difficulties is the “ever-expanding range of options that can quickly lead to decision fatigue,” according to Cerulli.

Asset managers can help advisors adopt ESG strategies by educating them on the benefits of ESG integration and the best ways to broach the subject with clients, and by differentiating their own investment solutions from others. Direct indexing can also help bridge the divide between advisors, their clients and asset managers on ESG investing, according to Cerulli.

(Image: Shutterstock)