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Advisers expect half recommended assets will be ESG within five years

Ecological building with the wall full of plants

Financial advisers expect demand to rise sharply for ESG assets according to new research1 from the lang cat. They estimate that the proportion of ESG investments recommended in five years will be 48%, compared to just 19% today.

The findings form part of Crossing the ESG Event Horizon – an adviser’s guide, a new report from the lang cat, supported by Schroders, which seeks to understand the issues around considering environmental, social and governance factors alongside financial factors in the investment decision-making process. It notes that while interest in ESG was already rising before the coronavirus pandemic, the virus has sharpened both consumer and regulatory focus.

Advisers are already adjusting processes in expectation of greater regulation around ESG and increasing retail demand for ethical investments. Three quarters (73%) of those surveyed by the lang cat already have some degree of process around ESG at the fact-finding and suitability discussion end of things and 23% report they are actively constructing a process now.

However, the research also exposes the difficulty in making informed choices about ESG investments. Eight in 10 financial advisers (80%) surveyed agree that confusing terminology hampers the selection process, while more than two fifths (44%) feel they don’t have the tools or materials to properly assess ESG solutions for their clients. Three fifths (60%) believe the solution is for asset managers to transition to ESG factor assessment as standard.

Steven Nelson, Insight Director at the lang cat, commented: “As public awareness of ESG values increases, much of the manufacturing side of financial services has gone straight to product mode without fully understanding the underlying issues or the views of the people that matter – customers and their financial advisers. The result is a plethora of investment solutions branded ESG but with conflating terminology, making it torturously difficult for advisers to make an informed comparison.

“In addition, the advice sector continues to evolve towards a consultative, life-coaching, objective-oriented environment, focussed on the client rather than the product. The potential for future regulation to mandate the measurement and implementation of individual sustainability beliefs could create an unmanageable situation for advisers without a step back to product-centric recommendations. To shift ESG investing into the mainstream while maintaining a client-centred approach, the onus must be on institutional investors and asset managers to include environmental, social and governance factors in their normal investment process, so effectively we can all become ESG investors.”

Sheila Nicoll, Head of Public Policy, Schroders, added: “It is encouraging to see that advisers are already preparing for the ESG regulatory activity that is almost undoubtedly coming their way. The direction of travel from the EU is very clearly moving towards greater sustainability disclosure for asset managers and for advisers to take the client’s ethical preferences into account when recommending financial solutions. While any equivalent UK regulation may be slightly less prescriptive, the mood music is certainly similar here.”

You can read the lang cat’s full ESG report here.

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