ESG investing growing despite limited understanding

ESG

Investment decisions based on environmental, social and governance (ESG) factors are growing in popularity among investors, despite a limited understanding of what they entail, research has found.

The 2020 Financial Adviser survey, conducted by fund data and technology company FE fundinfo, reveals that while 56 per cent of advisers have increased the amount of client money they have invested in ESG funds over the past year, 62 per cent believe that their clients don’t understand what ESG investing involves.

Despite ESG growing in investor, adviser and media consciousness, Mikkel Bates, Regulations Manager at FE fundinfo, believes that, in reality, even fewer investors have a practical understanding of the concept:
 
“I think it may be an overstatement that 38 per cent of advisers believe their clients have an understanding of what ESG involves. They may do in a very broad sense, but I doubt that many have considered the practicalities of how, for example, an environmentally-friendly investment may not be sustainable, or vice versa. There is a huge difference between how ‘responsible’, ‘ethical’ and ‘sustainable’ investing is perceived and as an industry we must do more to provide clarity and transparency.”
 
Among ESG factors, the research also reveals that investors primarily favour funds that have limited or zero impact on the environment. A quarter of financial advisors listed environmentally-friendly investments as their clients’ preferred ESG consideration, followed by ethical investments (eg avoiding certain companies, sectors or industries) at 24%. Companies with strong corporate governance, or focus on social impact or Islamic finance seem to be less of a concern for investors, with 8 per cent, 4 per cent and 3 per cent of advisers saying this would be their clients’ primary ESG motivation.
 
The research also found that advisers believe that the growing demand for ESG investments, is mostly coming from investors themselves. Over a third of advisers (36 per cent) believe the growth in ESG is primarily investor led, while just 7 per cent say it is being driven by institutional pressure alone. Around 38 per cent said it was primarily a mixture of investor demand and institutional offerings.
 
What is clear, the research reveals, is that ESG investing is set to increase further in the coming years. The vast majority of financial advisers (82 per cent) believe the number of ESG propositions will increase over the next year and many are already taking steps to meet client demand. More than half say they already offer ESG as part of their investment propositions, while a further 37 per cent say they plan to do so in the immediate future.
 
With the growth in ESG investing, the industry may soon get to the stage where every investment meets ESG criteria. FE fundinfo’s Mikkel Bates says: “In the future we will reach the stage where ‘ESG’ as a term will cease to be. It will be expected as ‘the norm’ by investors and will be provided by fund managers as part of the status quo. Most funds will factor it into their propositions so that it will no longer be considered a ‘specialist’ factor.”