Despite rising ESG acceptance, advisors’ understanding remains limited

New research points to increase in ESG offerings as responsible investing 'trade-off' perceptions fade

Despite rising ESG acceptance, advisors’ understanding remains limited

Following the remarkable performance displayed by responsible investing funds in the past 18 months, advisors are more likely to include ESG offerings in their product shelf. But as a new study shows, that’s not where their job should end.

In a new study from Platforum titled UK Financial Advisers: Investment Propositions, the majority of advisors surveyed said they’ve updated their centralised investment propositions with ESG offerings that are fully risk-rated. ESG factors have also become one of the top five criteria for 27% of advisors in selecting a fund.

As reported on Money Marketing, Platforum found that what used to “dominate the discussion” in ESG just a few years ago was the “perceived tradeoff” between sustainability and economic returns. With the strong performance of ESG funds over the course of the COVID-19 crisis, this view has changed.

But even with their increased receptiveness, advisors surveyed by Platforum still have a “poor understanding” of responsible investing outside of the outmoded approach of simply excluding ESG offenders and poor performers.

“[T]here is a good deal of confusion still and advisers are adopting a wide range of solutions,” Platforum said.

Part of that confusion could be due to the catch-all use of the ESG label across the investing space, which Morningstar CIO Dan Kemp spoke to at the Sustainable Investment Festival. According to Investment Week, Kemp said that ESG is held back by its use as an “omnibus term.”

“It means different things to everybody,” he said. “Before we have a meaningful conversation about it, we have to simplify it.”

Sharing his own approach to explaining ESG, he described a Venn diagram showing two aspects of responsible investment research – ESG risk reduction and value preferences – that must be distinguished.

“We have to understand the more we reflect either ESG risk or values in portfolios, the smaller our universe gets,” he said. The upshot is that a filtering approach to fund selection represents only one part of ESG portfolio creation.

Kemp emphasized that incorporating values into portfolios leads to changes in their “underlying economic characteristics.” To illustrate, he showed how an ESG ETF and its benchmark have fundamental weighting differences in sectors such as energy and healthcare.

“Wherever you have those differences, that is going to lead to differences in outcomes … people ignore that when they build portfolios,” he said. “What they do is they take conventional asset allocation model and populate it with ESG funds.”


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