Cerulli Associates found plenty of interest in environmental, social and governance (ESG) investing, but far less action.
Simply put, something seems to be keeping 401k participants and other savers from actually adding ESG funds to their portfolios.
Researchers noted that the prevalence of investment products incorporating ESG factors, as well as the public’s awareness that these products exist, are both on the rise.
Asset managers are even on board with the idea, leaving Cerulli to conclude that the “discrepancy lies somewhere between the advisor and investor.”
“There are several factors at play to help explain why financial advisors have not wholeheartedly adopted ESG mutual funds and exchange-traded funds (ETFs),” Brendan Powers, senior analyst at Cerulli, said in a statement.
Survey respondents listed 1). a sense that ESG strategies do not fit into client investment policy statements (26 percent), 2). negative impact on investment performance (24 percent) and 3). cost (19 percent) as the top reasons for the lack of uptake.
Another potential explanation?
It might be an instance of ‘old dog, new tricks.’
“Advisors are aging. Roughly 36 percent plan to retire within the next 10 years,” Powers said. “With retirement in reach, these advisors are less likely to rethink how they manage client assets and are less likely to adopt strategies that incorporate ESG factors, especially if they have trouble understanding them.”
Cerulli suggested a few steps financial professionals should take to bridge the gap between investor interest and actual adoption of ESG strategies.
Asset managers can help educate advisors on how to use ESG within portfolios and how the products are performing. Then, once they’re more comfortable, advisors can connect the dots for clients.
“Data-driven educational material and more hands-on training will ultimately be what’s required. This effort will necessitate cooperation from asset managers supplying the product and their distribution partners (e.g., broker/dealer home offices, registered investment advisor custodians) that have built out the platforms for advisors to access the strategies,” Powers suggested.
“Moreover, the advisor should have the necessary training to break down complex investment products and help their clients understand them. Therefore, helping them apply these skills to talk about ESG strategies with their clients will be essential. Investor education should be a focus too, preferably through broader, more scalable digital marketing channels.”
Jessa Claeys is a writer, editor and graphic designer.
