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Square Mile Research: Advisers believe the future of advice lies in ESG and responsible investment

milan italy 10 April 2019: houses with garden on the terrace

Research released today by Square Mile Investment Consulting and Research (Square Mile) has found that financial advisers believe ESG, responsible, sustainable or impact investing will dominate their new business development within three years. 41.7% of advisers responding to a recent surveyfelt that over half of new clients will seek to invest in this way while fewer than four per cent believe advising on ESG and Responsible investment will account for less than ten per cent of their new business.

A comparison with a similar survey conducted by Square Mile at the beginning of 2020 supports this view that ESG and Responsible investment is a rapidly growing trend.  In Q1, around one fifth of respondents estimated that over 50% of their clients would wish to invest in a portfolio with an ESG or positive impact steer; however, by Q4 2020 over a third felt that this was the case.

While interest in ESG and Responsible investment has grown considerably in recent years, the research found that Covid-19 has acted as a catalyst for greater take up of strategies that adhere to these approaches.  67.7% of those advisers surveyed believe the pandemic has led to investors placing a greater importance on the potential of doing good with their money, with 39.2% stating that their clients have a particular interest in environmentally focussed investment.

The research also demonstrates a greater appreciation of the financial potential of ESG and Responsible investment.  Over three quarters of respondents stated that their clients do not believe returns are sacrificed by investing in this way, although only six per cent feel they will be comfortable with any greater volatility.

Despite this increased client interest, fewer than half of advisers (48.2%) surveyed have integrated ESG into their Centralised Investment Propositions or included a specific question in their Attitude to Risk Questionnaire (43.4%).  And while most advisers feel they have a good understanding of changing regulatory requirements surrounding Responsible investment, they indicated a need for greater guidance on these obligations as well as compliance from asset managers.

The survey also highlighted the view that ESG should be integral to the culture of an asset manager.  Over three quarters (79.8%) stated ESG should start at a company level, rather than be used as an opportunistic product push.  As in Q1 2020, Liontrust and Royal London were seen as market leaders in conveying their messaging on their ESG strategies, but advisers still feel that they require greater transparency surrounding methodologies and fund holding information from fund groups in general.  They also expressed an interest in a greater availability of mixed asset and equity strategies with responsible and sustainable mandates.

Steve Kenny, Square Mile’s Commercial Director, said, “Our two surveys conducted during the first and last quarters of 2020 demonstrate considerable progress in the acceptance of ESG and Responsible investment as compelling propositions for advisers and their clients. This has no doubt been driven by a number of factors.  Clearly, there has been significant media interest in Responsible investment and the strong performance of many strategies in this space has led to the realisation that to invest sustainably does not come at the cost of financial performance.  Significantly, our survey suggests that the tragic human and societal impact of the Covid-19 pandemic has galvanised investors’ desire to use their money to help create a more equitable and sustainable world.

“Encouragingly, there is evidence of a greater understanding of the terminology used to describe sustainable and responsible investment among financial advisers.  In Q1, 63.2% felt comfortable with the phraseology used, rising to 77.1% by the final quarter of 2020.  Nonetheless, complexity and a lack of information from asset managers still remain a barrier to greater uptake.  All in all, it is heartening that as 2020 drew to a close, most advisers (69.6%) felt optimistic about the prospect for their businesses in the coming year with none claiming to be concerned.”

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