How ESG Latency Will End at RIAs

An inaugural study by SEI shows a gap between client interest in environmental, social, and governance factors and RIAs using those factors in portfolios. But that may be narrowing.

Qilai Shen/Bloomberg

Qilai Shen/Bloomberg

SEI, the financial services company that manages $399 billion in assets and is the administrator of another $880 billion, is a custodian for hundreds of RIAs. Many of those are private wealth managers, so SEI created an inaugural survey to see exactly what they were thinking and doing when it came to investing with environmental, social, and governance (ESG) factors in mind. The company wasn’t sure what it would find out.

“Because we serve over 7,500 of these very unique, highly independent small business owners, we really didn’t have a set of expectations going in, other than we wanted to learn,” said J. Womack, the managing director of investment products and services for SEI’s advisor business.

Some of the results — such as the fact that 80 percent of RIAs said that client demand was the primary driver of incorporating sustainable investing strategies in portfolios — didn’t surprise Jana Holt, global director of sustainable investing solutions at SEI. But other data was less expected.

“We did start to see some interesting nuances emerge [among] different groups of advisors,” Holt said about the survey, in which 800 RIAs participated. Firms that took the survey included those managing a wide range of assets and some were also affiliated with a broker-dealer.

Investor awareness and interest in ESG have grown in recent years, and at least one study suggests that wealth managers as a whole have underestimated the demand.

SEI’s study also showed that a gap persists between the number of investors interested in ESG portfolios and the RIAs that are building them. Forty-two percent of RIAs say their clients have expressed interest in sustainable investing “at least sometimes.” Meanwhile, only 34 percent of RIAs have implemented sustainable investing strategies for their clients, according to SEI’s survey.

But that gap may be narrowing.

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“I think we [may be] starting to see the latency period subsiding,” Holt said.

As more ESG investment products and services come to market, a growing group of early-adopter RIAs have begun to build ESG portfolios. And the RIAs that are holding out, Womack and Holt said, are doing so because of problems that can be resolved.

Education is one barrier. Twenty percent of RIAs told SEI that they’re still unfamiliar with sustainable investing and don’t plan to use those factors within the next two years, while 40 percent said they still don’t know enough about sustainable investments to make suitable recommendations to clients.

Nearly one in three RIAs (30 percent) said that the performance of sustainable investment strategies are the biggest barrier to implementing ESG funds in client portfolios. Out of the 800 RIAs surveyed, 19 percent specifically cited a lack of information and education about the investments, while 9 percent of RIAs said that greenwashing was a concern.

While it’s true that many ESG funds don’t have long track records, many are nearing their liquidation period. Better data about risk management and performance is on the horizon. With some effort and tools, wealth managers can start to remove the greenwashed wool from their eyes.

“I think it really does come down to both education and comfort, or fluency, with sustainable investing,” Holt said.

Bridging the ESG gap between what clients want and what a wealth manager is offering will be increasingly important, because younger investors care more about it. (Among investors under age 40 who believe their wealth manager is committed to ESG efforts, 52 percent said that they plan to increase their investment with that firm. Only 24 percent of investors over 40 said the same.) However, RIAs with clients who have expressed interest in sustainable investing said that demand was fairly balanced across millennials, baby boomers and members of GenX, according to SEI.

The survey also found that one-third of RIAs experienced increased client interest in sustainable investing during the Covid-19 pandemic and since the invigoration of the racial equity movement last summer. However, there was nearly three times the interest in climate and climate-related issues, including alternative or renewable energy and natural resources, than there was for other issues such as multicultural and gender diversity.

“Our research demonstrates that RIAs are committed to addressing the rising client and prospect demand for sustainable investing, but [that they] don’t yet feel prepared to deliver appropriate counsel or investment strategy,” Womack said. “It’s critical that we continue to educate advisors, so that they can confidently embrace the increasing demand and empower all investors to achieve their financial and sustainability goals.”

Correction: A previous version of this story misquoted J. Womack. SEI’s Independent Advisor Solutions works with 7,500 RIAs, not 1,700.

Michael Thrasher (@Mike_Thrasher) is the editor at RIA Intel and based in New York City.

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