Huge jump in dedicated ESG investing – trend expected to grow over 5 years

9 May 2021

The Covid-19 pandemic prompted a huge jump in environmental, social and governance (ESG) investing, new research from FE fundinfo has shown.

The 2021 Financial Adviser Survey found that two thirds of advisers are now investing more of their clients’ money in dedicated ESG fund propositions compared to this time last year. In contrast, just 1% of advisers said they are choosing to invest less into ESG options.

The survey also discovered growing investor demand for ESG solutions. While last year’s findings suggested interest in the sector was driven by a combination of both investor demand and institutional sales pressure, nearly three quarters (73%) of advisers surveyed for this year’s report said clients were more interested in ESG investing compared to 12 months ago.

Advisers expect demand to continue to rise, with 76% anticipating that clients will have more than a quarter of their portfolios invested in ESG funds within the next five years.

Oliver Oehri, co-head of FE Fundinfo’s ESG Group, said: “Despite the uncertainty and volatility that many investors will have faced over the past year in the wake of the Covid-19 pandemic, the interest and inflows of assets into ESG investment propositions has been truly staggering.

“We are now seeing a rapidly maturing market attracting a new and diverse range of ethically minded investors who are as conscious of the impacts of their investments as the returns they generate. This is an exciting opportunity for financial advisers, who as the FE fundinfo Financial Adviser survey shows, are taking proactive steps with their own investment propositions to capitalise on this surge in interest. Most encouragingly, advisers are viewing ESG investing as a long-term trend and are preparing themselves accordingly. With greater data provisions and clearer ratings systems in the market, the potential for further growth in the years to come is huge.”

Dedicated ESG propositions

In response to the shifting trends, nearly two thirds (65%) of advisers said they have a dedicated ESG proposition already in place, while a further 26% are planning to introduce one shortly.

However, advisers admitted that a lack of agreement at policy level for advisers to work towards has acted as a barrier to further ESG uptake. When asked to name the three biggest barriers preventing them from promoting ESG investing to their clients, 62% cited a lack of clear standards and definitions, while 52% stated a lack of readily available data solutions and the potential for greenwashing.

As a result, advisers are adopting a number of different approaches in terms of the due diligence they carry out on ESG funds. The majority (62%) said they use screening tools on investment planners, while slightly more than half said they review an individual fund’s documents. Meanwhile, nearly a third (29%) said they review a fund’s holdings at base level.

Rob Gleeson, chief investments officer at FE Investments, said: “ESG’ as a term on its own is not particularly helpful for either advisers or clients. It has broadly been spoken about from an institutional point of view as a catch-all solution to a complex problem. Retail investors and adviser clients don’t tend to think along the lines of whether their portfolios are ‘ESG portfolios’, but rather that their investments are not doing any harm and that they align with their own values. These are subjective decisions which advisers will have to get to the heart of and they will need to understand the range of suitable services within the market to meet their clients’ needs.”

Professional Paraplanner