A discrepancy between growing interest in environmental, social and governance investing and actual investment could lie somewhere between the advisor and investor, according to a new report from Cerulli.
In “U.S. Product Development 2018: Priorities for Active Managers,” Cerulli’s research identifies that the supply of investment products incorporating ESG factors is increasing in the retail intermediary market and home offices have bought into the idea of ESG investing, yet actual investment is lagging.
“There are several factors at play to help explain why financial advisors have not wholeheartedly adopted ESG mutual funds and exchange-traded funds (ETFs),” explains Brendan Powers, senior analyst at Cerulli.
The report explains that asset managers are most commonly using ESG factors in their investment analysis because they believe in the merits of ESG factors and want to align their investment objectives with client values and perceived client demand. Yet, 41% of advisors still agree that ESG/socially responsible investing (SRI) attributes are a bonus, but not a necessity, when choosing products, the report notes. Additionally, 33% disagree that products with ESG/SRI attributes are more sustainable and can deliver better performance.
The most significant factors keeping advisors from using ESG strategies are their perceptions that these strategies do not fit into client investment policy statements (26%), negative impact on investment performance (24%) and cost (19%).
Advisor demographics may also be a factor, as nearly 36% of advisors plan to retire within the next 10 years, the report notes. “With retirement in reach, these advisors are less likely to rethink how they manage client assets and are less likely to adopt strategies that incorporate ESG factors, especially if they have trouble understanding them,” Powers observes.
Given investor interest and asset manager/home-office efforts, Cerulli believes the key to ESG investment product adoption lies with the advisor. To grow advisor mindshare, Cerulli suggests that asset managers help advisors understand how to use ESG in client portfolios, as well as help educate them about the products, so they feel comfortable discussing the subject.
To address concerns about performance, managers will need to demonstrate ESG strategies provide market-level performance as their new products begin to accumulate track records, the firm further advises.
“Data-driven educational material and more hands-on training will ultimately be what’s required,” Powers suggests. He further explains that this effort will necessitate cooperation from asset managers supplying the product and their distribution partners (e.g., broker/dealer home offices and RIA custodians) that have built out the platforms for advisors to access the strategies.
Moreover, Cerulli recommends that advisors should have the necessary training to evaluate the investment products and help their clients understand them. As such, helping them apply these skills to talk about ESG strategies with their clients will be essential, the report notes. Investor education should also be a focus, ideally through broader, more scalable digital marketing channels, the firm adds.