How much do UK investors really care about ESG investing? It is a question that has perhaps become as divisive as the notion of exactly what ‘ESG’ is.
As outflows from Article 8 funds continue to pick up pace throughout 2022, you could be forgiven for thinking that “not much,” is the most obvious answer.
Charles Schwab, the US investment manager, seeking to get to the heart of the issue, published some interesting research recently that found the majority of UK retail investors are “not concerned about whether their investments are sustainable”, with just 44% saying they “regularly” consider ESG factors when making an investment.
By almost every marker the prospect for ESG investing to recapture the popularity and the public imagination it enjoyed throughout 2020 seems unlikely.
The favourable market conditions that supported its growth – and returns – have gone, at least for the time being.
The technology boom that underpinned much of the growth in ESG funds is faltering and has been replaced by markets dominated by rising costs of living and wider geopolitical events.
The critical test of ESG investing’s popularity would always centre on its ability to generate returns and now, with record oil and gas prices leading to strong share price returns from those sectors, it may well be a few years before the markets again rotate again towards “sustainable” stocks.
The role of the adviser
Another key question surrounding ESG investing has always been where the demand for sustainable investment products initially came from.
Some have said that it was largely top down, that is from the industry (fund houses and global institutions) spotting new market opportunities, while others believe it is largely investor-led, whereby socially conscious investors have demanded more from their providers.
However, one overlooked market player is perhaps quietly making the case for ESG investment products in the UK.
That is the financial adviser, often said to be the “middleman” in the investment chain.
Financial advisers are often seen as the bridge between the industry and the end investor and play a crucial role in explaining, and indeed selling, investment products within the market.
Their expertise carries a lot of weight and their insight can tell us a lot about market movements.
See also: ESG Clarity’s adviser Q&As with Thomas and Thomas, Investing Ethically and Foster Denovo
FE’s 2022 Financial Adviser Survey reveals some interesting analysis of where the markets and ESG investment products may be heading.
This year we specifically asked advisers about their attitudes towards, and their clients’ interest in, ESG investing.
In contrast to the Charles Schwab report, which took the retail clients’ viewpoint, we found advisers are overwhelmingly positive about ESG investing.
Some 72% of advisers incorporate ESG factors into their client service, with a further 21% planning to introduce them within the next year.
Added to this, two-thirds of advisers say they have increased the amount of client money invested in ESG propositions over the past 12 months. Only 1% say they have reduced the amount invested in the same products.
The positivity among advisers towards ESG investing is having repercussions among their clients too.
When asked whether their clients’ interest in ESG investing has increased, some 80% said it had, with 19% saying it had “significantly” increased, 26% saying it had “to some extent”, 20% for particular types of client and 14% when they had explained what ESG investing entailed.
Barriers to ESG investing
We have already seen the difficulties ESG investing has faced owing to market conditions, but it is clear the industry can do more to help advisers in promoting sustainable investments.
When asked what challenges they face, more than half of advisers (56%) said the lack of a clear set of industry standards was the biggest barrier to further promotion, while 55% and 46% of advisers respectively said the potential for greenwashing and a lack of data solutions were significant issues.
Nonetheless, despite these challenges, ESG is everywhere and it is certainly not going away.
In a sense, ESG investing has been a victim of its own success and, like the technology sell-off, the rapid growth it enjoyed was always going to be unsustainable.
While events outside of the industry’s control are undoubtedly affecting the performance of “ESG” funds and the related outflows, more can be done to support those making the case for its success.
Financial advisers are among ESG’s biggest advocates and by giving them the tools they need, they can ensure UK retail investors remain informed and interested.