Advisers appear to be coming round to the growing popularity of ethical investing, as research shows the majority of IFAs increased their ESG allocation last year and expect it to grow further in 2020.
Research from FE Fundinfo’s Surfing the Wave financial adviser report showed 56 per cent of advisers had increased the amount of client money invested in ESG investments in 2019.
Of the 217 advisers polled in November and December last year, not a single adviser had decreased their ESG investments while 45 per cent said it had remained steady.
The data also showed half of advisers already incorporated ESG factors into their investment propositions. Some 37 per cent did not but were considering to do so, while just 13 per cent did not plan to incorporate ESG into their offering.
Environmental, sustainable and governance (ESG) investing takes into account ESG factors alongside financial markers in the investment decision-making process.
It has become a more commonplace part of the global investment space in recent years, but ESG campaigners have long pinpointed a lack of interest from IFAs as the primary cause of the products’ slow take up in the UK retail market.
For instance, in an FTAdviser talking point poll last summer, more than one third (34 per cent) of advisers said they were likely to never consider ESG funds for their clients.
But the FE Fundinfo data showed 82 per cent of advisers thought the demand for ESG options would increase over the next 12 months, while 17.5 per cent thought it would stay the same.
ESG still has its doubters — I still am sceptical about some definitions — yet is definitely here to stay and will continue to evolveTim Morris, IFA at Russell and CoLess than 1 per cent (0.65 per cent) of advisers polled thought demand would decrease.
This is hot on the heels of a big year for ESG investing. Morningstar data showed investors piled an average of £124m a week into UK ESG funds over the first nine months of 2019.
When asked what was driving the growth in demand for ESG, the most popular response was ‘investor demand’, with 35 per cent of advisers experiencing this from their clients.
Some 6.5 per cent cited institutional pressure, while just 0.65 per cent thought regulation was an important factor.
Amendments to Mifid II (expected to come into force in Q1 2021) will mean advisers will need to be more proactive with customers in relation to ESG considerations by asking them about their preferences.
Concerns have been flagged over clients’ understanding of ESG investments, however. Some 61 per cent of advisers surveyed by FE Fundinfo thought their clients did not understand what ESG investments involved.
This concern was mirrored by FE Fundinfo’s regulations manager Mikkel Bates. He said: “I think it may be an overstatement that 38 per cent believe their clients have an understanding of what ESG involves.
“They may do in a very broad sense, but I doubt that many have considered the practicalities of how, for example, an environmentally-friendly investment may not be sustainable, or vice versa.
“There is a huge difference between how ‘responsible’, ‘ethical’ and ‘sustainable’ investing is perceived and as an industry we must do more to provide clarity and transparency.”
Tim Morris, independent financial adviser at Russell and Co Financial Advisers, said: “ESG still has its doubters — I still am sceptical about some definitions — yet is definitely here to stay and will continue to evolve.”
Mr Morris said he had increased his clients’ exposure to sustainable equity funds over the past few years and would continue to do so, adding he thought it was too early to say whether ESG funds would ‘outperform’ in the current market downturn.
imogen.tew@ft.com
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