As the concept of ESG investing has taken off, one of the fundamental questions surrounding the industry, which arguably is yet to be answered, is where is this insatiable demand coming from?
Within the media there are stories published daily about new ESG investment products being launched, catering for investors of every type, or an announcement of a new policy or regulation designed to clarify what exactly constitutes an ‘ESG’ investment.
While it is true that there has been considerable focus on a new type of ethically minded investor emerging in the marketplace, it still remains unclear whether it is end investors themselves, or institutions who are leading this trend.
An answer of sorts to this perennial question was offered by our recent 2021 Financial Adviser Survey. Published each year to track the main drivers of the financial advice industry, the report naturally has focused more on ESG investing as the years have progressed.
One of the specific questions asked of financial advisers is where, in their day-to-day jobs, they see this demand coming from. Nearly three-quarters reported there has been an active increase in interest among their clients about ESG investing and putting more of their money into ethical and sustainable propositions. While naturally, financial advisers have reported different levels of interest among their clients (24% said their clients’ interest had increased to ‘a limited extent’ and 20% said ‘certain types of client’ were more interested), only 11% reported their clients remained completely unconvinced by ESG investing.
Correspondingly, the respondents to the survey also reported they were investing more of their clients’ money into ESG propositions. Two-thirds said they are investing a greater proportion of their clients’ assets into ESG investment vehicles, while a miniscule 1% said they had reduced their exposure. This is coming at the expense of traditional asset classes too; while for instance exposure to property and UK equity funds fell by 46% and 36% respectively, 61% refocused more assets into ESG funds.
It is clear then that among financial advisers at least, there is a groundswell of active interest in ESG investing from end investors and that in order to meet this demand, institutions are right to expand their offerings in this area. In a competitive marketplace, the need for distinguishable and flexible ESG investment propositions is clear and becoming clearer.
The good news is that both end investors and fund groups have, in financial advisers, an engaged and active conduit between product and buyer. Nearly half the advisers surveyed (46%) identified increased client interest in ESG investing as the biggest opportunity for their businesses in the coming years.
As such, the research revealed 92% of financial advisers already incorporate ESG investing into their offering, or are planning to do so imminently, while nearly half have a custom-built ESG proposition, or outsource to a specialist.
Within these propositions, advisers are also actively managing the process and ensuring high levels of due diligence to avoid potential ‘greenwashing’. Half say they actively review a fund’s factsheet to see what ESG factors apply to a fund, 38% compare a variety of fund sources and external information, while 29% are using internationally recognised standards such as ecolabels to judge a fund’s credentials.
Our latest research pre-dated the Sustainable Finance Disclosure Regulation, which went live in Europe (but not the UK) on 10 March this year, so it will be interesting to see in future surveys whether the classification of ESG funds into those promoting ESG characteristics – known as Article 8 funds – and those with sustainable investment objectives – Article 9 funds – will become a shorthand way for advisers to filter funds.
Although our research by no means provides an overwhelming consensus on the top-down/bottom-up question, it certainly shows that among end investors there is a receptive audience for even greater levels of ESG investing.
Ultimately, the issue of whether demand is being driven by institutions or investors is likely to become less important as their interests become ever more aligned. After all, the disclosure regulations were introduced to encourage more money to be directed into sustainable investments, however that is achieved.
Mikkel Bates is regulatory manager at FE fundinfo and an ESG Clarity editorial panellist.