Advisers’ ESG use could be at tipping point: Survey

Financial advisers increasingly have made ESG investment options a part of their business in recent years — but a growing percentage now say they plan to cut back on recommending such investments, according to results of a survey published Wednesday.

Forthcoming rules from the SEC might be playing a part in that, and the trend could change with more regulatory certainty, one adviser says.

More than a third of 413 advisers surveyed by the Financial Planning Association indicated they include ESG in clients’ portfolios, a figure that had been rising but has budged little over the past four years. In 2018, for example, 26% of advisers said they recommended ESG funds to any clients.

However, 15% of those in the recent survey said they will likely recommend ESG investment options less over the coming 12 months. That’s up from 4% who said the same in 2021, according to the FPA.

By comparison, 26% of advisers this year said they plan to cut back on non-wrap mutual funds in client portfolios, and 14% said the same about ETFs.

The results don’t necessarily show that interest in ESG is declining overall, however. About 28% of advisers said they plan to increase ESG use in the next 12 months, up from 24% who said that in 2021, the survey found.

There are several likely causes for the rise in the portion of advisers who said they are planning to recommend ESG investing less, said Preston Cherry, practitioner editor of the Journal of Financial Planning, which produced the report in conjunction with the FPA.

One of the reasons could be the bout of underperformance relative to securities that include a higher proportion of energy-sector holdings.

“If ESG investing has reached an inflection point, it could be due to several factors, including higher fees, lower performance, or a lack of ESG impact and index differentiation that inspires investment,” Cherry said in the FPA’s announcement of its findings.

NOT THE SAME IN EVERY CASE

Some advisers might be wary of making ESG recommendations before the SEC issues its final rule on ESG disclosures for advisers and fund providers, said James Lee, president of Lee Investment Management and president-elect of the FPA.

That rule, along with a proposal around ESG product naming and a forthcoming final rule on ESG disclosures for public companies, will almost certainly have an effect on ESG investing and the demand for it.

“In my own practice, about 15% of clients are using ESG-type of investments,” Lee said. “It’s not a majority, by any means. But it is increasing.”

Among clients who do use ESG, most have the majority of their invested assets in that category, he said, and most commonly, those investments are in ETFs.

“Clients are more aware of the fact that there are ESG opportunities out there,” Lee said. “Some [existing] clients and new clients do not know that these types of opportunities exist, so as part of my onboarding process, it’s a question I ask.”

According to the FPA’s survey, clean energy is the top objective for ESG investing, with 32% of advisers citing it. That’s more than twice the rate of those investing in sustainable property and finance, the group noted. Behind those are water management and sustainable transport and infrastructure, each at 12%, according to the report.

Nearly half of advisers pointed to asset managers as the best source of ESG data, although a quarter said they look to third-party ESG ratings to vet funds.

MORE CONTEXT

Advisers in the survey said they’ve been getting more questions about cryptocurrencies than ESG. But those advisers have also been pulling back from crypto recommendations.

Last year, for example, 14% said they recommended that asset class, a figure that came down to 11% in the current survey, the FPA found. This year, 13% said they plan to increase crypto recommendations, while 11% said they will do less of that.

Related Topics: Financial Planning Association