There are several disconnects between the way financial advisors implement environmental, social, and governance (ESG) investing with their clients and the willingness of retail investors to embrace this manner of investing, according to Cerulli Associates.
For ESG investing to grow in retail channels, and in 401k plan menu options, the Boston-based research and consulting firm says advisors and asset managers must work to bridge these gaps and ensure that they fully understand the appetite for ESG investing among retail investors.
In a 2020 survey, Cerulli asked financial advisors about the reasons preventing them from adopting ESG strategies in their client portfolios. By far, the most prevalent response was a lack of investor demand.
More than half (58%) of surveyed advisors said this lack of investor demand was a significant factor preventing their adoption of ESG strategies, and an additional 14% reported that it was a moderate factor.
Advisors maintain a widely held belief that demand for ESG strategies among their clients is a non-issue. In numerous conversations Cerulli held with financial advisors about ESG and responsible investing, most advisors reported that only a handful of clients had reached out to them about ESG investing.
In contrast, Cerulli’s survey of U.S. retail investor households found that nearly half (44%) of households would prefer to invest in an environmental or socially responsible way—far more than the “handful” of clients that advisors report proactively reaching out around the topic.
“Based on our research, advisors generally underestimate the demand their clients have for ESG and should not interpret lack of proactive questions as a lack of client interest,” Matt Belnap, Cerulli senior analyst, said in a statement.
Coming down market
Another common misconception among advisors is that interest in ESG investing is limited to their high-net-worth (HNW) clients. This sentiment is also shared by asset managers. In a Cerulli survey, two-thirds (66%) of asset managers expected high demand from HNW investors (those with more than $5 million in investable assets). Another one-quarter of asset managers expect moderate demand from HNW investors.
Expectations of asset managers and financial advisors do not necessarily align with the preferences of retail investors, according to Cerulli’s research on the topic. More than half (56%) of households with between $100,000 and $250,000 in investable assets agree that they would rather invest in companies that have a positive social or economic impact.
“By viewing ESG investing as merely a HNW solution, asset managers and advisors are discounting the interest from a broad swath of the investing public,” Belnap added. “Both asset and wealth managers should seek to make ESG investing more accessible across wealth tiers.”
Ultimately, Cerulli believes there is an opportunity for wealth management home offices and asset managers to better educate financial advisors on productive ways to broach the subject of ESG with their clients.
“If home offices can show advisors that their clients are generally open to discussing or implementing ESG solutions, and asset managers can provide them with tools and templates for successful conversations, fewer advisors will be held back by the ‘lack of client demand’ hurdle,” Belnap concluded.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
