After more than 30 years, environmental, social and governance investing (ESG) seems to be finally having its day. Stories abound about the record flows, soaring investor interest and surge of new products in the ESG space. But many financial advisors are much less enthusiastic. As noted in our "Warning: It Won’t Be Easy to Get Advisors to Sell ESG" blog, just two in five advisors currently sell ESG products to their clients(according to research that we conducted in partnership with Horsesmouth), and less than one-third of those advisors ask every client if they are interested in aligning their investments with their values.
Navigating the discussion with clients about ESG was the number one reason that advisors who do sell ESG do not explore a potential interest in these products with every client as mentioned in our "Risky Business: Getting Advisors to Talk about ESG to Clients" blog post. But even advisors who sell ESG are skeptical about these products, with one-third of these advisors citing skepticism about some aspect of ESG investing as a top obstacle.
More specifically, 23% of the advisors using ESG products said that the difficulty in knowing which products are truly committed to ESG—as opposed to the ones who just say they are—was a key reason for not asking more clients if they are interested in ESG investing. Recent headlines about an SEC probe into “greenwashing”—the practice of marketing a product or firm as more committed to ESG issues than it truly is—is only reinforcing these concerns. After all, the advisor loses the client’s trust if the “sustainability fund” she recommended turns out to be less environmentally-minded than the client thought.
One recommendation for asset management firms in our "ESG Report Series: Help Advisors Sell More ESG" report to overcome this skepticism is to provide clear and differentiating detail on the ESG approach and process. In fact, doing so will prompt 44.4% of advisors who sell ESG products to choose your product over a similar product with comparable performance that does not provide these details.
What a manager means by “ESG investing” is different for every firm—and sometimes, different even among products at the same firm. Advisors also want to see that the firm applies a rigorous and consistent approach to its ESG evaluation, just as it does to financial analysis. So, providing robust details about the approach and process doesn’t just help advisors understand what your firm means by “ESG”—it’s critical to increasing advisor confidence in your ESG products and understanding how those products differ from your competitors.
Unfortunately, few firms do a good job of providing the answers advisors need. We have identified six topics that asset managers should cover in their content about the ESG element of their investment process. Here’s a quick overview:
Overall Approach and Goals — How the firm defines “ESG,” “sustainability” and similar terms it uses, as well as any general areas of focus, lays the foundation for solid understanding. Explaining how your firm measures success adds credibility.
Evaluation Criteria — Clearly defining the issues and values the firm uses to evaluate potential holdings—and explaining the approaches you use (e.g., exclusion, best in class, materiality)—is crucial to helping advisors gauge how well your products match their clients.
Data Quality and Analysis — Accurately assessing the ESG risks and opportunities of portfolio holdings starts with the data being used and the experience of the people doing the evaluation. In fact, 24% of advisors said they would choose a product that details the quality and number of ESG data sources and tools on its website over a similar one with comparable performance that does not.
Criteria Application — Details on how the firm applies its criteria to potential holdings help the advisor understand how the ESG evaluation impacts the product’s diversification and risk profile, as well as what the firm does that’s different from others.
For example, the following graphic from Northern Trust’s ESG Vector Score illustrates how the firm doesn’t just assess a potential holding’s past performance on the firm’s criteria—it also evaluates its performance relative to competitors and what its future performance and/or risk on these issues is likely to be.
This graphic illustrates one of the unique ways Northern Trust analyzes criteria — with a three-pronged historical, competitive and future view of the criteria and data. Image source: NorthernTrust.com
Intersection With Financial Evaluation — Explaining how the ESG and traditional investment evaluations come together helps reassure advisors that delivering solid long-term performance is important to the managers of these products.
Active Ownership Parameters — Evidence of active ownership—such as proxy voting, proposing shareholder resolutions and meeting with companies on ESG matters—can be an important demonstration of commitment to ESG strategies. So, firms that conduct these activities need to show that they have a thoughtful policy and process in place.
Having website content that provides clear answers in plain speak for all six elements of a product’s ESG approach and process is essential, but it’s just a start.
As the research for our "ESG Report Series: Help Advisors Sell More ESG" showed, growing sales of ESG products through advisors will require asset managers to undertake a multi-faceted effort to build advisors’ confidence in the ESG products themselves, as well as their own abilities to use them effectively with clients.
Written by Tracy Needham
Sr. Business Research Analyst, Research, Analytics and Consulting