ESG investing continues to grow despite lack of investor understanding

Over half (56 per cent) of financial advisers have seen an increase in the amount of client money invested in environmental, social and governance (ESG) funds over the past year, despite the majority (62 per cent) believing that clients don’t actually understand what ESG investing involves.

The 2020 Financial Adviser survey, undertaken by FE Fundinfo, also revealed that despite this lack of perceived understanding, over a third of advisers (36 per cent) thought that the growth in ESG was primarily investor led.

Meanwhile just 7 per cent stated that it is being driven by institutional pressure alone, and a further 38 per cent attributed the growth to a mix of these factors.

Furthermore, the “vast majority” (82 per cent) of advisers thought that the number of ESG propositions would increase further over the next year, with many already taking steps to meet growing client demand.

However, FE Fundinfo regulations manager, Mikkel Bates, warned it may be an overstatement that 38 per cent of advisers believe their clients have an understanding of what ESG involves.

He explained: “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.”

The research revealed a primary focus on the E of ESG, with investors primarily favour funds that have “limited or zero impact” on the environment, and a quarter of financial advisers listing “environmentally-friendly” investments as their clients preferred ESG consideration.

This was followed closely by ethical investments, which was ranked by 24 per cent or respondents as a key consideration.

However, the role of stronger corporate governance was less of a consideration for clients, with just 8 per cent of advisers ranking this as a primary client concern,

Meanwhile, a focus on social impact or Islamic finance showed were the lowest ranked considerations, being a primary concern for just 4 per cent and 3 per cent of advisers clients’ respectively.

Bates added: “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.”

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