The investment world is increasingly talking about the importance of integrating ESG across products and investment ethos’ more broadly, particularly as more ESG funds are launched and traditional funds rebranded.
But for UK advisers, although the popularity of ESG options is increasing and conversations with clients around the topic becoming more sophisticated, specifically badged up products are still preferable in the short term.
This was a finding of an updated NextWealth survey of 203 advisers, 12 adviser interviews and interviews with 17 asset managers, three ratings agencies and five investment platforms. The ESG Tracker Study Update found despite most advisers believing that in time all funds and solutions will have a degree of ESG integration, in the short run most prefer to use badged products to meet specific client needs.
“I think we’re at the point where it’s becoming good window dressing for the asset managers, which probably means we’re close to a tipping point. It has to be window dressing first before it becomes core to the process,” Alasdair Walker, director at Handford, Aitkenhead & Walker, said in the report.
Conversations with advised clients about ESG or related investing is on the rise – 19% up from 7% in 2019 – with an increase in sophistication of the terminology being used. And this is expected to rise, with 68% of advisers expecting to see assets invested in these funds and solutions increase.
Discussions with clients about ESG investing can also help them become more comfortable with risk, software company Oxford Risk has said.
“The biggest behavioural cost to investing is usually not what people do when they are investing. It is the fact that large chunks of cash are left on the side because people are not emotionally comfortable moving out of cash and they surrender returns as a result,” said Greg Davies, head of behavioural finance at Oxford Risk.
“However, people are more willing to buy something for which there is a narrative that resonates with them. If you can use ESG for that you are going to get people willing to deploy that cash to not only do good, but also become better investors.”
Regulation and barriers
The NextWealth report concludes regulation is likely to be the biggest driver towards ESG solutions. “It is reasonable to assume the FCA will introduce regulation not dissimilar to the EU and that this will demand that the adviser is not only aware of the views of the client on ESG and sustainable investment, inter alia, but will also have an understanding of the criteria and methodology adopted by the product provider, e.g. asset manager or life company, in respect of ESG or sustainability. The FCA is considering on-shoring parts of SFDR,” it said.
“The focus to date in the UK has been on disclosures from listed companies. We expect the next phase will be toward disclosures from asset managers to allow for easier comparisons between funds and solutions. While the UK has diverged from the EU in the short term, we expect the approaches to look more similar in the longer term.”
Advisers in the study also highlight barriers to ESG integration, including lack of choice of funds, too much exposure to certain asset classes, and not enough interest from clients. Some 6% noted difficulty with ratings agencies and product research, and 5% were sceptical or wary of greenwashing.
“The thrust is from providers and this appears to be a sales approach rather than help and assistance in understanding of why we should adopt the approach. If a client is interested it’s their choice and they will be guided by us but how would we know,” one respondent said.
The report includes a due diligence checklist for advisers looking to expand their ESG knowledge or offerings. It suggests questions such as what data is being used? How is that data used by fund houses? Is the fund manager a signatory to an agreement, such as the PRI? If so, what is their PRI rating? How transparent is the firm? It also suggests action points such as going over due diligence, finding an ESG expert and thinking about further inclusion of ESG in client fact-finds and meetings.