Financial advisers in the UK predict a surge in consideration of ESG factors during the investment decision-making process over the next few years.
According to a report by consultancy the lang cat, supported by Schroders, planners believe nearly half (48%) of the recommendations they will make on assets and investments in the next five years will be ESG.
This compares with their estimate of less than one-in-five (19%) today.
Retail demand for ethical products is increasing and financial advisers are already adjusting to the shift in demand.
Some 73% of advisers surveyed currently have some degree of ESG processes when fact-finding or having suitability discussions, while 23% are actively building similar strategies.
But a large majority of advisers (80%) said confusing terminology used for ESG products can hamper the selection process, and they are finding it hard to make informed decisions on this type of investments.
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Also 60% believe it is up to the asset managers for standardising ESG factor assessments, as 44% feel they don’t have the right tools to properly assess ESG solutions for their clients.
Confusing ‘plethora of solutions’
Steven Nelson, insight director at the lang cat, said: “As public awareness of ESG values increases, much of the manufacturing side of financial services has gone straight to product mode without fully understanding the underlying issues or the views of the people that matter – customers and their financial advisers.
“The result is a plethora of investment solutions branded ESG but with conflating terminology, making it torturously difficult for advisers to make an informed comparison.”
This confusion extends to ESG data and ratings. One respondent to the survey said: “The nature of ESG data is unreliable in how it is gathered, scored and evaluated. It is inherently subjective and based on limited information.”
Stephen Mitchell, head of proposition at FE Fundinfo, said: “The correlation between any two providers averages 0.16. That is the mathematical equivalent…of close your eyes and throw your dart at a dartboard…There isn’t a right or wrong…make sure you explain to the advisory firm that they need to engage in this and make a decision knowing what they are buying as a rating”.
Meanwhile, the advice sector continues to evolve towards “a consultative, life-coaching, objective-oriented environment, focussed on the client rather than the product”, Nelson said.
“To shift ESG investing into the mainstream while maintaining a client-centred approach, the onus must be on institutional investors and asset managers to include environmental, social and governance factors in their normal investment process, so effectively we can all become ESG investors.”
Sheila Nicoll, head of public policy at Schroders, added: “It is encouraging to see that advisers are already preparing for the ESG regulatory activity that is almost undoubtedly coming their way. The direction of travel from the EU is very clearly moving towards greater sustainability disclosure for asset managers and for advisers to take the client’s ethical preferences into account when recommending financial solutions.
“While any equivalent UK regulation may be slightly less prescriptive, the mood music is certainly similar here.”
This article first appeared in ESG Clarity‘s sister publication International Adviser.
