The rise in ESG is plain to see, with fund manufacturers rushing to develop products and catch the responsible-investing wave. That desire was captured in a 2018 survey by Cerulli Associates, where 55% of asset managers said they were looking to create ESG investment solutions.
But according to a new report from the research firm, at least part of this sentiment is probably driven by a fear of missing out (FOMO). “At the recent ICI General Membership meeting, broker/dealer (B/D) and fund company executives spoke of a first mover advantage, comparing the ESG market to the exchange-traded fund (ETF) space,” the firm said in the most recent Cerulli Edge: U.S. Monthly Product Trends report.
The ETF space, it explained, is now dominated by a few small players who adopted the ETF wrapper even during its nascency. Now asset managers — particularly active ones, as they’re a better fit for the complex, subjective, and intensely index- and data-dependent nature of ESG — may make a bid for early movers in hopes of being a dominant player down the line.
But “[a]sset managers will need to balance this desire … with the need to allocate the time and resources it takes to implement ESG principles into their investment philosophies,” Cerulli warned. To ensure their credibility, it said, active managers must create explicit and differentiated ESG strategies and implement them fully.
Crafting ESG strategies, the report added, is best done in collaboration with advisors and broker-dealer firms. Advisors may be comfortable with excluding sin stocks from portfolios, but not so much when it comes to other approaches; active managers would do well to fill the vacuum in positive screening, tailoring their product to advisor demand.
“Cerulli data has shown that asset managers may have overlooked opportunities in emerging markets equity, and overestimated demand in alternatives and taxable fixed income, when compared to the product desires of high-net-worth (HNW) practices,” the report said.
It’s also critical for managers to connect with millennials. Previous research by Cerulli suggests that millennials in the US are due to receive US$68 trillion in wealth over the next 25 years; in Canada, Investment Planning Counsel estimated roughly $1 trillion in personal wealth changing hands from 2016 until 2026, with some 70% in the form of financial assets.
“Advisors who can talk to the next generation of clients about issues and investments that are important to them will be more successful in gaining clients and gaining assets,” Cerulli said. “Asset managers that are truly knowledgeable about ESG, with well-defined processes and well-trained distribution teams, can be strong allies for advisors as they work with younger, more ESG-sensitive clients.
Active asset managers that seek partnerships with advisors in reaching pro-ESG investors, the firm said, should couple strong ESG offerings with tools such as designated product specialists, thought leadership pieces, and other educational materials.
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