ESG Interest Among Advisors Might Have Peaked, New Survey Finds

Financial advisors' use and recommendation of environmental, social and governance investing strategies may be trending downward, according to a survey released this week by the Journal of Financial Planning and the Financial Planning Association.

The survey, which added questions about ESG in its 2018 iteration, found that 34% of advisors were using or recommending these strategies to clients in 2022, up 2 percentage points from last year, but down from a peak of 38% in 2020.

Twenty-eight percent of advisors said they plan to increase their use of ESG in the next year. At the same time, 15% plan to decrease usage over the same period, compared with just 4% in 2021. Advisor sentiment on the asset class could mean less use by advisors going forward, the study said.

Waning client interest may be fueling this potential shift away from ESG. Thirty-one percent of planners reported that they have fielded client questions about ESG or socially responsible investing in the past six months, down from 39% who said this in 2020 and 2021.

"ESG investing aligns individual principles, purpose and values with the virtuous greater good of the human condition and the Earth," Preston Cherry, practitioner editor of the Journal of Financial Planning, said in a statement. "Sometimes such missions and esteemed purposes come with higher investment costs and slightly trimmed investing returns."

Cherry said that if ESG investing has reached an inflection point, several factors may account for this, including higher fees, lower performance, or a lack of ESG impact and index differentiation that inspires investment.

The Journal of Financial Planning and FPA fielded the survey in February and March 2022, and received 413 responses from financial planners who provide or implement investment advice or recommendations for their clients.

Other ESG-Related Findings

A third of planners said they are monitoring research in the ESG space and considering dedicating a portion of their clients' portfolios to those types of investments over the next one to two years.

Meanwhile, 17% have started looking into ESG strategies, but do not foresee making any investments in the next three years.

Nearly half of advisors said asset managers and portfolio management teams with ESG expertise are the best source of ESG data. But a quarter of survey respondents said they rely on third-party raters to evaluate funds.

Thirty-two percent of advisors cited clean energy as their main objective when considering an ESG fund, more than twice the number of those who said they seek sustainable property and finance solutions in ESG funds.

Twelve percent each said water management and sustainable transport and infrastructure are their main investment objectives.

When selecting ESG funds for clients, 37% of advisors said integrated risks/opportunity is the most attractive approach. Nineteen percent said they look for funds that use a positive screen, while 15% prefer negative screens.

Crypto Trends

This year, FPA and the Journal of Financial Planning also examined digital assets after the 2021 survey revealed notable shifts in advisor use and sentiment.

In 2021, 14% of advisors said they used or recommended cryptocurrencies, which was a significant jump from 2020, when less than 1% used or recommended them. This year, only 11% of advisors say they use or recommend them.

Although 13% of survey participants plan to increase their use of digital assets over the next 12 months, 11% intend to decrease their use over the same period — a 7-point jump from the previous year.

Client interest has remained the same, with 47% of advisors saying they have received client questions about cryptocurrencies over the past six months, compared with 49% in 2021.

Advisors "must keep client goals, risk tolerance and capacity in mind when recommending any investment — especially with cryptocurrencies since they remain an emerging asset class," Cherry said.

"The survey results clearly show clients continue to be curious about cryptocurrencies. But they need to work with their advisor to ensure they are behaviorally sound, receive objective advice and invest within their risk tolerance and capacity."