Asset managers are betting big on environmental, social and governance investing (ESG) to drive organic growth over the next few years and beyond, with 72.4%[i] of firms saying that these funds are a top product development priority over the next year. But advisors aren’t nearly as enthusiastic, requiring firms to be much more strategic about how they approach them.
In fact, our latest survey found that just two in five advisors have used ESG strategies in client portfolios. Even among those who have, ESG strategies represent only about 5% of their assets under management.[ii]
Firms that make investments in the ESG space need to focus on building advisor confidence in ESG products by educating them about the advantages and opportunities that they can bring.
Institutional investors have long been the primary driver of flows to ESG strategies. According to the Forum for Sustainable and Responsible Investment, just 27.5% of the ESG assets at the end of 2019 were managed on behalf of retail and individual investors. So asset managers will have to light a fire under advisors to fill the coffers of all the ESG products flooding the space—especially if direct indexing takes hold, as we expect, enabling advisors to easily customize portfolios to each clients’ unique set of values and concerns.
In our "How to Win Over ESG-Reluctant Advisors" report, we look closer at the advisors who have not yet incorporated ESG strategies into client portfolios to get a better understanding of the reasons for their reluctance, the depth of their resistance, and what asset managers can do to overcome that.
Growing the ranks of advisors using ESG strategies won’t be easy. Our analysis found that half of the advisors who aren’t currently using ESG products are not good prospects yet, based on the objections they cited and a complete lack of interest in even learning how ESG may benefit their clients.
But while the obstacles for asset managers are notable, the movement toward ESG products is well underway, and there are potential opportunities for firms to move the needle further.
To understand more about the resistance of the three in five advisors not currently using ESG—and whether there are differences in what asset managers need to do to win them over—we analyzed the responses of these “non-ESG” advisors and broke them into three groups based on the likelihood of adopting ESG strategies.
Specifically, our analysis found that 15.6% of advisors who don’t currently use ESG strategies have a high interest in learning more about ESG investing and intend to begin using ESG strategies within the next year. And nearly a third (31%) are neutral about ESG, so many are open to influence from asset managers that have a clear message and compelling data to show the advantages of offering such products.
This will take concerted effort and coherence on the part of firms. The myriad definitions and approaches to ESG investing create a sea of potential confusion for advisors to navigate.
And it will take a while to chip away at the deeply ingrained resistance seen in some advisors. Asset managers and other stakeholders will have to work to resolve some of these issues and accelerate change.
For now, asset management firms aren’t always helping the situation. Asset managers must do a far better job of cutting through the confusion and making advisors more confident in their ESG products so that they, in turn, can feel confident offering them to their clients.
Our research pinpointed four key strategies that asset managers can execute on their own, to grow the ranks of advisors using their ESG products:
- Define and detail your version of ESG
- Clarify the impact of ESG on portfolios
- Help advisors prepare for interested clients
- Drive investor demand
While the first two strategies are a must-do for every firm in the ESG space, the last two are most relevant to those asset managers who are investing heavily in ESG strategies—so they can make the most of their investment.
For more, read our "How to Win Over ESG-Reluctant Advisors" report.
<[i] SS&C Research, Analytics, and Consulting, Productivity Insights BI Survey, 2020
[ii] Source: SS&C RAC, ESG Survey, 2021, in association with Horsesmouth
Written by Tracy Needham
Sr. Business Research Analyst, Research, Analytics and Consulting