Many advisers may misunderstand investors' ESG motives

Interest in socially conscious investing remains on the rise, according to a pair of recent InvestmentNews surveys of financial advisers and investors. But as the practice matures from relatively simple social responsibility screens to more holistic assessments of environmental, social and governance factors, financial advisers may misunderstand what makes this brand of investor tick.

For starters, advisers seem to be hung up on the first letter of the burgeoning ESG movement, overestimating the extent to which environmental considerations such as climate change, clean technology, emissions and resource efficiency drive client assets into the category.

In the surveys, 54% of advisers identified one of these issues as the top ESG factor for their clients, while only 36% of investors themselves claimed environmental issues as their primary concern.

As a result, advisers correspondingly underestimated the salience to investors of other factors, particularly corporate structure, accounting and transparency; human rights; and product integrity and supply chain management.

This is perhaps unsurprising, since only about one in five advisers said their firm initiates client conversations around ESG criteria.

Misunderstandings of client motivations behind ESG investments, as wells as a tendency to simplify the category to its environmental components, may also lead advisers to discount the conventional financial expectations of these investors.

Among investors currently implementing an ESG strategy, 84% believe it has a positive association with corporate financial performance. Yet even among the advisers currently using ESG factors in client portfolio construction, only 56% agreed.

The disconnect suggests that while the vast majority of ESG investors sees no conflict between their social and financial goals, some advisers who integrate ESG factors are lagging their clients in placing them within a traditional investment case.

​This is an investment movement, after all — not a philanthropic one.

Advisers who offer ESG investing were comparatively more likely to view it as a strategy for engaging younger investors and retaining multigenerational households.

With interest in ESG skewing toward younger demographics, these are not unimportant considerations. Advisers who currently offer ESG investing expect it to only grow in popularity: on median, they projected the share of their clients employing the strategy to double to 30% over the next three years.

That expectation may be driven by advisers' observation of stronger interest among millennial investors, many of whom are still in the early stages of building wealth. Advisers estimated that 38% of these clients were highly interested in ESG factors – more than four times the level of interest they noted among baby boomers.

Yet this age group is also the least likely to express interest in consulting a financial adviser on ESG issues and the most likely to look to an online platform for guidance. Advisers could face fierce competition to capture these younger ESG investors, even as more of them accumulate assets and move into profitable territory for the industry.

ESG strategies, and the investors who employ them, are becoming more and more sophisticated. To fully realize the business opportunity they represent, advisers can start with a fuller understanding of these investors' decision-making.

[More: BlackRock puts climate at center of $7 trillion strategy]

The data included in this blog post come from the 2019 InvestmentNews/Calvert study Opportunity Knocks: How advisers can capitalize on growing ESG interest. If you have any input or ideas for upcoming research on the topic, please contact the IN Research team at inresearch@investmentnews.com.