The interest in Environment, Social, and Governance (ESG) factors for investment is slowly permeating the investment industry. Aside from large institutional players, asset managers are finding increasingly positive sentiment towards such strategies from retail investors.
But even with retail interest on the rise, ESG investment products aren’t exactly blowing up in clients’ portfolios. And according to new research from Cerulli Associates, that’s because there’s a critical choke point.
In its new report US Product Development: Priorities for Active Managers, Cerulli found that asset managers that include ESG factors/criteria in their investment analysis do so because they believe in the merits of ESG factors (100%), want to align their investment objectives with client values (91%), and perceive client demand (90%). On the retail investor side, 46% agree that investing for positive social and environmental impact is better than avoiding harmful investments; among investors under age 40, that percentage goes up to 65%.
But according to 41% of advisors surveyed by the firm, ESG or Socially Responsible Investing (SRI) attributes are a bonus, not a necessity, in choosing products. Another 33% did not agree that such products are more sustainable and capable of delivering better performance.
“There are several factors at play to help explain why financial advisors have not wholeheartedly adopted ESG mutual funds and exchange-traded funds (ETFs),” said Brendan Powers, senior analyst at Cerulli. “A sense that ESG strategies do not fit into client investment policy statements (26%), negative impact on investment performance (24%), and cost (19%) top advisors’ reasons to not use ESG strategies.”
Powers added that advisor demographics may play a role. The firm has found that roughly 36% of US advisors plan to retire within the next 10 years, making them less likely to “rethink how they manage client assets” and “adopt strategies that incorporate ESG factors, especially if they have trouble understanding them.”
To address the challenges in ESG adoption, Cerulli argued that addressing performance concerns and growing advisor mindshare are essential. On the question of performance, asset managers must prove their ESG strategies can provide market-level performance over time as the track records for their new products grow longer.
Asset managers will also need to help advisors understand ESG’s place in client portfolios with data-driven educational material and more hands-on training. “This effort will necessitate cooperation from asset managers supplying the product and their distribution partners (e.g., broker/dealer home offices, registered investment advisor custodians) that have built out the platforms for advisors to access the strategies,” Powers said.
“Moreover, the advisor should have the necessary training to break down complex investment products and help their clients understand them,” he added.
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