Wealth managers are mistaken about investors' demand for ESG investments, a new report by Cerulli Associates suggests. Financial advisors are underestimating their interest and “several disconnects” exist between how advisors implement such strategies and the willingness of retail investors to embrace them.
In a 2020 survey, the Boston-based research and consulting firm asked advisors what prevented them from adopting environmental, social, and governance strategies into their client portfolios. The firms indicated that “by far” (58%) the most common reason offered was a lack of investor demand. Another 14% said lack of interest played a “moderate” role. In sum, advisors characterized ESG demand as a “non-issue.”
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Cerulli stated that in multiple conversations it held with advisors about ESG and responsible investing, most advisors said that “only a handful of clients had reached out to them about ESG investing.”
However, Cerulli cautioned advisors against drawing conclusions.
“Based on our research, advisors generally underestimate the demand their clients have for ESG and should not interpret lack of proactive questions as a lack of client interest,” says Matt Belnap, senior analyst.
Cerulli’s survey of U.S. retail investor households found that 44% of households would prefer ESG investing, which is “far more than the ‘handful’ of clients that advisors report proactively reaching out around the topic.”
Why the discrepancy? Cerulli notes that ESG investing, which has been around for decades, remains an “amorphous concept” to many advisors. Combined with ever more investment options, it can fast lead to “decision fatigue” for them.
“For ESG investing to grow in retail channels, advisors and asset managers must work to bridge these gaps and ensure that they fully understand the appetite for ESG investing among retail investors,” Cerulli states.
Demand for ESG investments is slowly trickling down from the top, the report suggests, with leading ESG managers reporting the strongest demand from multi-family offices and RIAs that serve high-net-worth and ultra-high-net-worth clients.
The children of HNW/UHNW clients as well as entrepreneurial clients are driving current interest, which is spreading to different client segments, the report states.
Cerulli notes that 56% of households with between $100,000 and $250,000 in investable assets would prefer to invest in companies that have “a positive social or economic impact.”
How can advisors bridge this gap and more proactively broach the topic of ESG investing?
“If home offices can show advisors that their clients are generally open to discussing or implementing ESG solutions, and asset managers can provide them with tools and templates for successful conversations, fewer advisors will be held back by the ‘lack of client demand’ hurdle,” says Belnap.
Greg Bartalos (@gregorianchance) is editor of New York City-based RIA Intel.