Advisers are in dire need of further support and education to understand ESG strategies and products, as a Rathbone study reveals significant gaps in advisers’ knowledge
In the study The value of ESG: how mainstream is ESG investing within today’s adviser world?, where Core Data was commissioned by Rathbones to survey 100 UK advisers, it was found that although many advisers are beyond believing ESG is a passing fad, they need to support in further understanding and integrating more responsible investment practices.
This is also despite a significant number of advisers also admitting ESG investments “facilitated client retention”.
The study split 100 advisers into two groups; one populated by advisers with 20% or less in ESG investments, the ‘non-ESG adopters’, and the other with a significantly higher 60% or more allocation, the ‘ESG advisers’.
Both groups anticipated allocations to ESG will rise significantly in the short term, but even more so for the non-ESG adopters where 94% said their allocation will grow over the next three years – although ESG advisers were not far behind with 90% indicating their exposure will also increase.
The report said: “Today, £17.4trn of assets globally are already classed as adopting responsible investment strategies, a 25% increase since the previous review in 2014. Sustainable funds attracted £31bn in net inflows in the first half of 2019 alone.
“By 2025, millennials will make up an influential 75% of the workforce, with the pension, investment and wider spending power that accompanies this position. With this generation at the forefront of the demand for societal, business and ethical change, anybody still thinking ESG is a short-term fad has now had their final wake-up call.”
Both groups also agreed that ESG was key for client engagement and tenure, something that is critical to business stability and growth.
They said that clients interested in ESG investing tended to be more engaged with the investment process (64% of the non-ESG group and 76% of the ESG group agreed with this).
Furthermore, the research found ESG advisers enjoyed far higher retention than non-ESG adopters with 82% of the former group indicating they had an average client tenure in excess of ten years, compared to 52% for the non-ESG advisers. This gap widened further for client tenure of 15 years and more (56% versus 20%), the report said.
Despite this, there is still some way to go before ESG is more widely adopted, particularly for the non-ESG group, due to a lack of understanding on terminology and products.
Just over a third (34%) of the ESG adviser group said ESG is already fully integrated into their business, compared to 2% for the non-ESG group.
The report said further probing revealed just 38% of non-ESG advisers currently have processes in place that would enable them to deal with a rapid increase in client interest, contrasting with the 62% who said they would be able to deal with this imminently at the ESG advisers.
For both groups, however, education is still needed. Fewer than one in three (30%) of non-ESG adopters said they have a strong understanding of the different meanings of ESG/ethical/sustainable/green investing, but also 32% of ESG adopters said they did not understand.
Only 26% of non-ESG group said they understood the difference between ethical, sustainable, ESG and impact investing, but did not know how to apply them.
This dropped to 14% within the more experienced ESG group, but alarmingly, 13% of the combined groups wrongly felt that the terms were interchangeable.
In terms of solutions to this, advisers said they would be looking for specialist partners for specific ESG roles. Over half (58%) of non-ESG advisers said they would consider partnering for centralised propositions, 44% for DFM and 42% for fund investment. This climbed to 72%, 62% and 44% for the ESG group.
“While the tipping point for ESG investing is long past, advisers and providers need to do considerably more to inform and prepare themselves,” the report said.
In conclusion, Rathbones said the findings are “glaringly obvious” and that while some advisers were “historically naysayers about ESG as a fad”, or sceptical about its investment performance, there has been a “sea change in thinking, with adopters and low adopters alike now recognising ESG strategies’ ability to deliver for their clients”.
“Client conversations about ESG investing appear to have become business as usual and normalised, with just 3% of advisers saying they don’t talk to their clients about ESG.
“And while we set out to explore ESG adoption’s business value for advisers, the report demonstrates this reality time and time again. In ways as diverse as the speed of business growth, extended client tenure and client engagement.
“Yet more needs to be done. The study reveals significant gaps in many advisers’ knowledge of ESG strategies and products, and how to properly align them with client investment objectives. Adviser businesses – and providers – need to work closely together to overcome this, and better explain the value of ESG to their end clients.”
ESG Clarity has teamed up with with Square Mile Investment Consulting & Research to launch ESG Pathway, an educational forum and webinar series for the adviser community.
ESG Pathway is an interactive series of webinars that will expand dialogue between advisers, asset managers and independent expert commentators, while also giving a voice to the IFA community. For more information click here.