Some financial advisers cited the extra volatility they associate with ESG funds because of their narrowed universe. An additional concern is that ESG investing doesn’t always fit well with the risk-managed approach to building portfolios that the typical advisory firm adopts.
One financial adviser said: “If you strip out large sector areas you can essentially increase the risk, the volatility. One of the big drivers, quite rightly, from the regulator is assessing people’s risk and making sure that the investments that you have fit within that and then other things come secondary to that. How do I protect myself and my company and my other clients that I look after if this thing loses 30% or 40% in a heartbeat? The client says, well, yes, I know I said I wanted that positive impact thing and all of that, but I didn’t want to lose 20% or 30% in a week, and now I have.”
Knowledge gaps and confusion: “An absolute rabbit hole”
Although most financial advisers show positive sentiment towards ESG investing in general, they do not rate their knowledge of ESG highly. On a scale of 1 to 5, financial advisers rated their knowledge level as 3.0. Knowledge of impact investing was slightly lower at 2.7.
Among those advisers with a lower level of knowledge, there was uncertainty about ESG terminology and the different types of ESG fund. The fact that some ESG funds invest in the likes of oil companies was a further source of confusion. These advisers can feel overwhelmed by the topic and crave simplicity and standardisation, the research found.
One adviser said: “I’ve sat through various ESG webinars, and in all honesty, some of it is the jargon, the names for different things, I almost haven’t heard it enough times for the main words to resonate.”
Advisers and DFMs who are more knowledgeable about ESG still admit to knowledge gaps and areas of confusion. These include uncertainty over what ESG funds are available to them and how to measure funds’ ESG credentials. When it comes to client conversations about ESG, some are more comfortable with the topic than others.
A DFM commented: “The portfolio managing is pretty much the easy bit as far as we’re concerned. It’s actually gauging what clients’ expectations and preferences are in that space, which is probably the harder conversation because the whole topic is so diverse and you can go down an absolute rabbit hole.”
The difficulty of researching ESG investments is a problem among both advisers and DFMs. A majority of advisers (58%) and DFMs (55%) agreed with the statement “I am supportive of ESG, but I find it hard to research investments’ ESG policies and credentials.” Even among those who described themselves as early adopters of ESG, 47% agreed with this statement.
A financial adviser who was an early adopter of ESG investing said: “More of an understanding of certain ESG standards that the fund managers look for in companies before they invest would be helpful. What questions do they ask the directors and managers of companies in order for them to say, right, this is a company that meets the standards we are happy with?”
AIC comment on the research
Nick Britton, Head of Intermediary Communications at the Association of Investment Companies (AIC), said: “Our research shows that scepticism around the whole concept of ESG investing is now fairly rare among advisers. However, the fog of jargon and competing metrics and standards is confusing even for those who regard themselves as knowledgeable on the subject.
“The issue of performance is also crucial. The fact that various ESG investment approaches have performed well in recent years has shaped advisers’ attitudes, but of course, this isn’t guaranteed to continue in future.
“In the investment company world, we’ve seen companies with strong ESG credentials in high demand. Our renewable energy infrastructure sector, for example, has raised over £2.5 billion so far this year, helping to drive record fundraising for investment companies overall. Investment companies’ ability to invest in a wider range of assets, including unquoted impact investments, makes them attractive to investors who want their investments to do good and see that impact being measured and reported.”