Investor interest in environmental, social and governance / sustainable funds has waned over the past year, as lower performance, the cost-of-living crisis and the higher profile of the potential for greenwashing have impacted appetite for the sector, according to Professional Paraplanner’s latest survey.
The Parameters Survey found that the majority of paraplanners (46%) have seen interest for ESG investments dip, while 24% said they had seen a rise in interest among clients.
One in three (30%) paraplanners said they were unsure.
When asked what had caused the drop in interest, more than half (51%) of paraplanners cited poorer returns from ESG funds, while 38% said better returns from non-ESG funds had driven investors away from the sector.
“I see little interest in this investment area unless there is the potential for improved returns by going down this route,” explained one paraplanner. “My clients are chasing returns after the recent volatility in the markets.”
Another noted: “I don’t think it’s as prominent as it was in recent years with clients favouring better returns instead.”
A third (33%) of paraplanners also cited the cost-of-living crisis as affecting interest in the sector.
In addition to underperformance and investor concerns around personal finances, the ESG sector has also faced concerns around greenwashing. Earlier this year, the Financial Conduct Authority introduced its long-awaited guidelines and reporting standards to prevent greenwashing, following concerns that companies were making false claims around the sustainability of financial products.
One paraplanner explained: “There are many investment companies who have jumped on the bandwagon and when you actually look into the underlying investments they are not as ‘ethical’ as it would appear. Many more ‘sustainable’ funds started popping up but were not right for clients with a clear ethical bias.”
The sentiment was echoed by a fellow respondent who said: “In my opinion, the whole thing was a bit of a fad anyway and a lot of the funds were greenwashed. More work is needed in this area for more people to take it seriously.”
Nearly a quarter (23%) of paraplanners surveyed said they thought a downturn in interest had been driven by reduced adviser interest, with one calling for training around sustainable funds to ensure that advisers are recommending the correct funds to meet their client’s objectives.
Among those paraplanners who had seen an uptick in interest, an increased focus on ESG across the media and a desire to have ethical values reflected in fund choices were cited as common drivers.
According to one paraplanner, clients are becoming “more aware of the need to understand their investments and want to do good by them. However, they don’t want to delve too deep most of the time so a fund labelled as ‘sustainable’ is usually sufficient to their conscience.”
Will ESG become part of funds’ make-up over time?
The survey also asked paraplanners whether they see ESG becoming incorporated into all funds over time, therefore negating the need for specialist funds.
Nearly six in 10 (57%) agreed with the sentiment, nearly double the 31% who disagreed. The remaining 12% of paraplanners said they were unsure.
As one respondent explained: “The assumption by most clients is that all companies are doing their best to mitigate environmental impact so fund managers are going to be doing likewise, making the focus on ESG funds not as prevalent.”
Another commented: “A lot of investment management companies and providers are starting to make more statements on the way they run their businesses and I think this will ultimately filter more and more into the way funds are invested and managed.”
Growing interest among younger generations was also seen as a driving factor behind businesses and funds becoming more ESG-aware.
One paraplanner said they had seen a “marked strategy change” from investment managers to incorporate ESG as a norm, largely driven by younger investors and younger investment managers wanting to see businesses react to ESG factors.
However, a number of paraplanners said that extra reporting requirements would deter many from claiming ESG benefits, particularly as there is “limited evidence” that doing so would attract more investors.
Others noted that there will always be clients who have no interest in ESG and do not feel strongly about where their money is held, providing fund managers “free reign” to invest without the restrictions imposed by ESG.
One paraplanner commented: “Whilst it would be great to see investment companies adopting this approach across the board going forward it is unrealistic to think that it will become incorporated into all funds.
“There will always be clients who want absolute return regardless of where the investment return is coming from. There will also always be clients who need more specialised advice and are prepared to expose themselves to potentially more risk and the higher charges involved in this area of the market to align to their very ethical views.”
75% ask clients about ESFG preferences
Despite this, more than three quarters (77%) of paraplanners said they ask every client if they want to consider ESG/ sustainable investing. In comparison, just 12% said no and 11% said they were unsure.
The majority of paraplanners agreed that the question would arise during the client questionnaire and general factfinding process.
“It is part and parcel of our risk profile assessment and the answers they give there generate more in-depth discussions on the subject,” said one respondent.
Another told Professional Paraplanner that as part of the firm’s factfinding / annual review process, it provides clients with an ESG factsheet and asks if there are any areas that they feel they may want to align their investments with.
Looking ahead, 62% of paraplanners said they seen the current ESG trend staying much the same over the next 12 months. However, 23% of paraplanners said they expect it to start to gain more traction, while 15% disagreed and said they expect the decline to continue.
One paraplanner said: “I think take up largely follows general economic conditions. When times are good, ESG rides high. When times are rough, people return to the oil money.”
Another said that growth in the sector depends upon striking the right balance between investment strategy and achievable growth.
“ESG investment strategies do currently tend to have slightly higher charges and less diversification when compared to their non-ESG equivalents,” they explained.
“Obviously this does not apply to all and some ESG funds/ portfolios have shown excellent historical performance but most clients at some point are willing to forfeit some or all of their ESG preferences in favour of greater growth potential,” they added.
