More than half (51%) of paraplanners have seen a drop off in ESG investing among clients over the past year, in line with a downturn in the sector, according to Professional Paraplanner’s Parameters Survey.
In 2022, ESG funds recorded their first net outflows since 2011, as the start of the Russia/Ukraine war and volatility in the financial markets saw investors shy away from the sector.
One paraplanner told Professional Paraplanner: “It is all very well for clients to believe in ESG investing but when this comes at the expense of returns it is a different matter, which happened last year.”
Another said: “In times of economic hardship, unfortunately returns seem to come before principles. The rotation from growth to value hasn’t helped this as obviously most ESG companies tend to be growth orientated.”
Growth in the energy sector was also cited as a key driver behind a dip in ESG demand. As global energy prices soared in the wake of the Russia-Ukraine war, energy companies enjoyed significant gains. Big Oil saw its profits soar to a record $219 million in 2022, leading to investors receiving a record $110 billion in dividend payments and share repurchases.
One paraplanner told Professional Paraplanner: “I believe momentum has been lost simply because ESG investing is now well established but I also think the large profits realised by the big energy companies have made investors question whether they should completely abandon such investments.”
Another said “Performance has been poor compared with the wider market, which can largely be attributed to the rise in oil and energy prices as a result of the Russia/Ukraine war and high inflation. It seems that investors have a price. Many of them like the idea of investing in green and socially responsible companies, but not when it comes at the expense of their potential future security.”
The paraplanner said they have seen a large number of investors move from socially responsible portfolios back to mainstream ones because they’ve seen the gains that they could have made if they had been “fully exposed” to the whole of the market.
Another commented: “As the markets have been heavily reliant upon the energy sector, it has given less opportunities for growth in this area.”
The risk of greenwashing was identified as a further challenge for the sector, with the risk of false claims undermining trust and confidence in the market.
“Lots of talk about greenwashing is making investors sceptical about these investments,” admitted one paraplanner.
The view was shared by a fellow paraplanner, who said: “ESG was abuzz but when more and more people saw the greenwashing involved, interest declined.”
However, nearly one in three (29%) paraplanners surveyed said they had not seen a drop off in sustainable investing among their clients, despite events in the wider markets.
One told Professional Paraplanner that their firm’s sustainable portfolios had grown in recent years and its client bank had shown no desire to shift into other investments.
Another said: “With the increased media coverage of world changing climate events there is still a huge appetite for investment as it’s topical and in people’s minds.”
A further respondent said they believe that clients with a truly ethical appetite will continue to invest in ESG.
“The truly ethical clients have remained invested and are comfortable with the recent volatility as the funds align with their views. However, now that the funds are not producing the same level of returns it has put off new investors from wanting to invest within this area especially whilst the markets are experiencing losses across the board.
“There is very much still a place for these funds for clients who have strong ethical/sustainable views,” they added.
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