ESG: what are you talking about?
By Heather Hopkins | 07 June 2022 | 3 minute read
I notice that the BBC’s One Show and Radio Two have paired up to run a ‘Go Green’ initiative. The title instantly tells you it’s about sustainable living. Contrast this with the ESG terminology used for investing and it’s far less clear.
For the fourth in our series of reports that track the growth of sustainable investing, we’ve ditched referring to ESG and instead have called it the ‘Sustainable Investing Tracker Study’.
We’ve done this because our research shows that the term ESG in client conversations is taken to mean something different to the way the investment providers define it.
Risk v values
Asset managers use ESG to describe an objective measure of risk. Often, asset managers tell us their funds are fully ESG integrated, that ESG considerations are built into their decision-making process.
However, when an adviser talks to a client about sustainable investing, the conversation isn’t about the ESG risk factors that might influence the future price of a stock or fund. Instead, it’s about making choices about how capital is deployed to align more closely to values. This distinction is hugely important.
Using ESG to describe both is confusing. Like football in the UK compared to the US – same name, completely different games and a lack of understanding about this can lead to some misleading conversations.
Our latest report is free to download and includes interesting insights into how advisers are coping with the need to address sustainable investing with clients.
Here are a few highlights:
- Adviser confidence is low relating to sustainable investing, with only around half of the 200 financial advisers surveyed for the report saying they are ‘very confident’ or ‘confident’ in the steps of the advice process relating to sustainable investing, including understanding client preferences, researching products, recommending products and reporting to clients.
This highlights a significant gap and suggests more support is needed from product providers.
- The biggest challenges remain on-going reporting against sustainable investing objectives where only 36% of advisers report being ‘very confident’ or ‘confident’. One fifth say they are ‘not confident at all’.
- Growth in the share of client conversations where clients raise sustainable investing has stalled. The latest report shows 18%, compared to 19% 2021 and 17% in 2020. The big rise in client interest was driven by the pandemic: in 2019 it was just 7%.
- Environmental is the biggest issue in sustainable investing. The survey with advisers found that ‘environmental’ dominates client concerns when it comes to sustainable investing. This was supported in in-depth interviews with 14 advisers.
Which of the following sustainable preferences are asked for most by clients?
- 18% of client assets are in sustainable funds or solutions, down from 21% in 2021 but still higher than in 2020 when it was just 12%.
- A core-satellite approach, with sustainable investment solutions sitting alongside advisers’ core investment proposition continues to grow in popularity, rising to 66% in 2022 from 56% in 2020.
Preferred strategy to integrate ESG, ethical, impact and sustainable into the firm’s investment products