Advisers are missing the boat on ESG: Cerulli

Surveys of investors and financial advisers show a disconnect between what investors want with regard to environmental, social and governance strategies, and what most advisers think their clients want.

Contrary to many of the trends unfolding across financial services, advisers are not recognizing strong client demand for investments focused on environmental, social and governance strategies, according to a recent study by Cerulli Associates.

The report cites a 2020 survey of financial advisers that showed 58% of respondents said a lack of investor demand was a significant factor preventing their adoption of ESG strategies, and an additional 14% reported that it was a moderate factor.

According to Cerulli, advisers maintain a widely held belief that demand for ESG strategies among their clients is a non-issue.

The Cerulli report cited numerous conversations with advisers about ESG and responsible investing, where “most advisers reported that only a handful of clients had reached out to them about ESG investing.”

By contrast, Cerulli’s survey of U.S. retail investor households found that 44% of respondents would prefer to invest in an environmental or socially responsible way, “far more than that handful of clients that advisers report proactively reaching out around the topic,” the report states.

“Based on our research, advisers generally underestimate the demand their clients have for ESG and should not interpret lack of proactive questions as a lack of client interest,” said Matt Belnap, Cerulli senior analyst.

If advisers need more proof of the swelling appetite for ESG investing, they might consider the record-setting asset flows into funds categorized by Morningstar as sustainable. In 2020, flows into such funds hit a record $51.1 billion, which more than doubled the 2019 record of $21.4 billion. Those two record years followed six years of flows into sustainable funds hovering at or below $5 billion.

Another common misconception among advisers is that interest in ESG investing is limited to their wealthiest clients. Expectations of asset managers and financial advisers do not necessarily align with the preferences of retail investors, according to Cerulli.

More than half of households with between $100,000 and $250,000 in investable assets agree that they would rather invest in companies that have a positive social or economic impact.

“By viewing ESG investing as merely a HNW solution, asset managers and advisers are discounting the interest from a broad swath of the investing public,” said Belnap. “Both asset and wealth managers should seek to make ESG investing more accessible across wealth tiers.”