ESG Investing: Connecting Conversation to Actual Investment

ESG Investing: Connecting Conversation to Actual Investment

Cerulli reports that retail client channel awareness on the topic of environmental, social, and governance (ESG) investing is growing; however, asset managers should focus on converting interest into investment opportunities.


December 2018, BOSTON. New research from Cerulli Associates, a global research and consulting firm, identifies that the supply of investment products incorporating ESG factors is increasing, that home offices have bought into the idea of ESG investing, and that society’s awareness of ESG factors is trending upward; yet, actual investment is lagging. According to Cerulli’s latest report, this discrepancy lies somewhere between the advisor and investor.

“There are several factors at play to help explain why financial advisors have not wholeheartedly adopted ESG mutual funds and exchange-traded funds (ETFs),” states Brendan Powers, senior analyst at Cerulli. “A sense that ESG strategies do not fit into client investment policy statements (26%), negative impact on investment performance (24%), and cost (19%) top advisors’ reasons to not use ESG strategies.”

Advisor demographics may also be a factor. According to Powers, “Advisors are aging. Roughly 36% plan to retire within the next 10 years. With retirement in reach, these advisors are less likely to rethink how they manage client assets and are less likely to adopt strategies that incorporate ESG factors, especially if they have trouble understanding them.”

Based on investor interest and asset manager/home-office efforts, Cerulli believes the key to ESG investment product adoption lies with the advisor. To grow advisor mindshare, Cerulli recommends that asset managers help advisors understand how to use ESG in client portfolios and then educate them, so they feel comfortable talking about the subject. To address concerns about performance, managers will need to demonstrate ESG strategies provide market-level performance as their new products begin to accumulate track records.

“Data-driven educational material and more hands-on training will ultimately be what’s required. This effort will necessitate cooperation from asset managers supplying the product and their distribution

partners (e.g., broker/dealer home offices, registered investment advisor custodians) that have built out the platforms for advisors to access the strategies,” Powers suggests. “Moreover, the advisor should have the necessary training to break down complex investment products and help their clients understand them. Therefore, helping them apply these skills to talk about ESG strategies with their clients will be essential. Investor education should be a focus too, preferably through broader, more scalable digital marketing channels.”

Cerulli’s latest report, U.S. Product Development 2018: Priorities for Active Managers, focuses on how active managers are channeling their product-related efforts, and where there is demand for

actively managed product in the retail intermediary market. It takes a more detailed look at how financial advisors are constructing client portfolios, what investment products they are using, and how asset managers need to position their product offerings to meet demand.

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