A recent survey by Cerulli Associates indicated that many financial advisors may be underestimating client demand for ESG investing. Of the advisors surveyed, 58% said that they hadn’t yet adopted ESG strategies because of a lack of investor demand. On the other hand, the survey indicated that a plurality of clients were interested in ESG investing. What gives?
There are two main misplays that many advisors make around gauging ESG client demand.
The first is waiting on clients to come to you specifically asking for ESG investing, which is the same mistake as expecting a client to come to you asking for a specific type of financial advice. Clients don’t typically walk in the door asking for something as specific as a moderate weight equity allocation with tax harvesting. They don’t know the jargon or the details, which is why they turn to advisors for advice. It is the advisor’s role to work with the client to find the best investments to advance their goals.
The second is assuming that the only a niche of clients care about sustainable investing, such as the younger millennial generation (those born between 1981 – 1996). The idea is that Millennials, by their nature, are characterized as socially conscious and will gravitate to investments that fall into these categories.
Image By Cmglee – Own work, CC BY-SA 4.0,
While Millennials do care deeply about social issues, with a look to the future of the Earth, investment advisors and professionals would be remiss to assume that only members of this generation care about ESG for their investing.
A survey conducted by Morgan Stanley found that not only do Millennials care about sustainable investing, but over eighty percent of ALL investors now express interest in sustainable investing, and half of the respondents take part in at least one sustainable investing activity. This result was mirrored by a European survey of French and German retail investors conducted by 2Degrees Investing, which also found that two-thirds of the surveyed investors wish to invest sustainably.
Digging a bit deeper into 2Degree’s information, we find that:
- 43% of the respondents' main goal was an “environmental impact” on the real economy.
- 64% of respondents said that they would be willing to cut their total returns by 5% to invest sustainably.
- A mystery shopper program, also part of 2Degree’s research, found that the majority of financial advisors do not discuss sustainability preferences with their clients; what’s worse, even when prompted by the shopper, they did not offer suitable products to fill the client’s desires.
So what might be going on with these results? The researchers speculated that a social norm perception primarily drives consumers’ expectations regarding their investments. With topics like ESG, there is no defined social norm yet established, so many respondents are likely to answer whatever they think is the ‘appropriate’ response. When this is combined with the knowledge that most consumers do not adequately understand ESG-related concepts and do not trust financial institutions, advisors can fill a role to educate accurate ESG information and listen to the client’s investment desires correctly.
The Forum for Sustainable and Responsible Investment (USSIF) estimated that by 2020 the ESG market for the United States alone reached $18 trillion. Increasingly proactive retail investors are seeking products and solutions across asset classes specifically tailored to their ESG interests. Investor education and concrete reporting on specific metrics can help investors struggling to wrap their heads around their investments’ environmental and social impact.
ESG is an investment opportunity for all age groups. The good news is that now is the best time for for advisors to help their clients join the massive wave of ESG.