It's estimated that about $2.5 trillion in assets have some environmental, social and governance screening involved. So why aren't investment advisors adopting ESG investing as quickly as the rest of the investment world?
Some reasons found in a recent survey by financial consultant Practical Perspectives include lack of interest by clients, lack of training and education, or lack of a compelling reason to use ESG products. One advisor called it "a fad."
The firm surveyed more than 550 advisors, of whom 46% were affiliated with an independent broker-dealer, 30% were RIAs and 21% were with full-service broker-dealers. More than 50% had over 20 years of industry experience, and 47% were solo practitioners. Most advisors (65%) were 50 years or older.
Key conclusions of the study were:
1) There is a "clear distinction" between an "enthusiast" using ESG vs. typical users.
Researchers found that enthusiasts, which include roughly three in 10 advisors who use ESG, are those who actively promote ESG within a portfolio,and consider it "crucial to how they differentiate their practice and as a reflection of their personal beliefs." Typical users don't embrace ESG as a core philosophy, and usually only implement it to accommodate client demand.
It was found that four in 10 advisors have used ESG investing, including one in four that are current users. Further, full service broker-dealer advisors were the most familiar with ESG investing.
Users of ESG were younger, typically with 10 to 20 years of experience as an advisor, were part of a team, and had total AUM of $250 million or more.
2) Portfolio construction relies on third parties.
Most advisors who implement ESG into portfolios, even enthusiasts, are "heavily reliant" on packaged solutions, the study found. These include actively managed mutual funds or ETFs for the most part.
A small number — primarily a subset of enthusiasts — rely on individual securities when implementing ESG strategies. This suggests that most advisors leave screening of ESG to professional managers "who have resources and capabilities to oversee the specific criteria which relates to these factors." This also suggests advisors are less "hands-on" with ESG investments.
3) Advisors are open to broad-based managers, but prefer ESG-focused managers.
