Wealth managers and other providers are developing tools to support environmental and socially responsible investing, but the ESG approach still faces significant headwinds among advisors.
New research from Cerulli Associates found that in 2017, 45% of investor households cited ESG factors as a preferred method of investing. Enthusiasm is highest among younger investors — more than two-thirds (67%) of investors under age 30, and 64% of investors ages 30-39, cited ESG factors as a preferred method, according to the fourth quarter 2018 issue of The Cerulli Edge – U.S. Advisor Edition.
“In response to growing client demand and demographic trends, asset managers are actively working to develop and launch environmental, social, and governance products for client portfolios,” notes Ed Louis, a senior analyst at Cerulli.
Performance the Main Concern
While wealth managers and other providers are developing tools to support ESG investing, advisors and investors are implementing them in portfolios more slowly than intended, the report notes. Several factors have led to slower adoption, with the most significant being performance concerns, according to the report.
More than a third (35%) of advisors who do not employ ESG strategies cite fears about negatively impacting performance as a major factor in their decision, and three-quarters say that it is at least a moderate factor. Additionally, 41% of advisors believe that ESG and socially responsible investing (SRI) strategies “do not offer necessary performance,” the report notes.
In recent years, asset managers have steadily begun incorporating ESG into both existing investment strategies and new solutions, while also working to “dispel myths in the space.” When asked about challenges to increasing client demand for ESG strategies, nearly 30% of asset managers suggested that “misconceptions about performance” are a major challenge. An additional 68% report that it is as a moderate challenge.
“Asset managers recognize that increasing advisor adoption is a long-term project and are working diligently to address these concerns,” notes Louis. “Their efforts are achieving some results, as one-fifth of all advisors are beginning to consider using ESG and SRI strategies.”
When asked to identify the vehicles and strategies in which advisors express the greatest demand, nearly half of asset manager distribution executives cite ESG/SRI funds in the independent RIA (48%) and private bank/trust (44%) channels. Interest in the broker/dealer (B/D) channels, however, drops to less than one-quarter. Cerulli notes that B/D home offices are building ESG-focused platforms for advisors to leverage, but “uptake remains tepid.”
Cerulli’s finding echo those in a recent report by Callan which found that while adoption and implementation of ESG factors among institutional investors in 2018 were the highest in the survey’s history, the take-up rate among DC plans is lagging.
Cerulli sees a significant opportunity for asset managers and B/Ds to support advisors in integrating ESG/SRI offerings into their practices. “Investor interest is broader than many financial advisors likely realize and will continue to grow as asset managers demonstrate that investing with ESG does not necessarily require sacrificing performance,” the report explains.
It notes that investor interest has also facilitated the launch of model portfolios that can be positioned as “one-stop solutions.” On the retirement side, Natixis helped lead the way into ESG-themed TDFs in 2016, while both Wells Fargo and BlackRock in 2018 announced the development of ESG TDFs.
“While these retirement strategies help further familiarize both advisors and end-investors with ESG strategies, they also highlight a challenge that new offerings often face when attempting to gain platform placement,” the report explains.
It adds that many ESG teams are in the early phases of establishing their track records. Only 12% of strategies using ESG integration have management tenure of 10 years or longer, while the large majority (68%) have a manager tenure of less than five years.
The firm emphasizes that the need for continued education extends beyond the advisor and needs to reach investors. Louis suggests that providing advisors with materials to educate clients about a firm’s approach to ESG is crucial in increasing advisor adoption.