There is concern that, in the absence of any regulatory-approved definitions on what should make up an ESG or sustainable fund, the advice profession is feeling the lack of definitions the hardest.
Advisers are also worried they will be judged on asset allocation decisions made today by criteria developed in the future.
Wendy Appleton, head of UK wholesale sales at Pictet Asset Management told FTAdviser there was a huge amount of work still to do to align ESG and sustainable definitions.
“There needs to be something in place which is going to help advisers," she said.
“That is the segment of our market that is probably struggling the most with [questions of] incorporating ESG funds, including more responsible investing and getting these messages across to clients.”
There are currently no rules in the UK on what qualifies as a ESG or sustainable fund.
Advisers who do not demonstrate a commitment to and focus on ESG investing will lose clientsGreg DaviesThe FCA will soon require advisers to take sustainability issues into account when advising clients, and it is currently consulting on criteria to classify and label investment products for firms involved in investment management and decision-making processes.
Losing clients
Nearly two out of three retail investors (63 per cent) have or would consider moving investments to new advisers because they are unhappy about their wealth manager's ESG focus, according to research from Oxford Risk.
A survey of 1,022 adults between January 28 and 30 undertaken by Consumer Intelligence showed that 20 per cent of investors had already moved adviser for this reason, or were planning to do so.
One in three (31 per cent) of those questioned said they currently rate their adviser's ESG commitment highly or very highly.
Some 62 per cent said they were neutral about their adviser's ESG focus.
Greg Davies, head of behavioural finance at Oxford Risk, said advisers who did not demonstrate a commitment to and focus on ESG investing will lose clients.
In particular, he added, deployment of cash into new investments will greatly favour strong ESG propositions.
“The role of technology in the hands of investment providers and advisers is crucial to grasping the opportunities and meeting the responsibilities of matching socially-minded investors to suitable ESG investments.”
Woolly marketing
John Ditchfield, head of responsible investment at Helm Godfrey and chairman of Impact Lens, said there is still a knowledge gap.
“There is a problem, because most advisers don’t really have much knowledge and understanding in this area, it’s not something they’re terribly interested in, so you’ve got a dearth of knowledge and quite a lot of complexity.”
He said fund groups aren't making it particularly easy for advisers to understand what terms like ESG and sustainability really mean in each individual fund.
Over the past few years Ditchfield has reviewed investment funds to try and get a good understanding of their sustainability criteria.
“When you try and do that you just get hit with this wall of marketing spiel,” he said.
“It’s not [dealt with by] core investment teams…it seems to go through the marketing team and get spun in a certain way to appeal to a particular target audience.
“It tends to be a bit woolly.”
Chris Davies, executive director in the financial and advisers division at insurance broker Howden Brokers, agreed.
He said due to the fund management community’s eagerness to get ahead, they see a first mover advantage in branding their funds with an ESG label.
“That’s to be lauded, but there’s a danger for me that the marketing of the funds overtakes the actual underlying accreditation,” he said.
Greenwashing fears
Appleton added for different people, sustainability means different things, leading to concerns among advisers.
“There’s a lot of concern in the market around greenwashing," she said.
Research from Boring Money shows that 69 per cent of retail investors are worried about greenwashing, saying they’re concerned ethical and sustainable claims made by managers are not true.
Holly Mackay, chief executive, Boring Money said the firm sees a high interest in sustainable investing but there is growing frustration about being unable to decipher the documents.
“We think that sensible disclosure starts with understanding what information people actually want to see, so we’re building a prototype for disclosure in conjunction with end investors,” she said.
Davies said the problem lies in the speed at which the information surrounding ESG investments is changing.
If an adviser asks a client if they would like to invest in the types of investments that have an ESG responsibility, he said, most investors would say yes to that.
“But, on the other side of that, it may be the start of an explanation nightmare,” he added.
The problem lies with the emergence of opinions in lieu of hard facts.
“Without any standardisation of definitions, we’ve got around four opinions in the mix,” he said, saying that the client, adviser, compliance or research function in the adviser firm and the fund manager will all have different views on what qualifies as ESG-compliant.
“It seems to me that it is a very difficult job for advisers to do to match the client’s expectations and their desires of how they’d like to invest.
“The biggest worry we’ve seen is [advisers] worried that they will be judged in the future by standards that apply in the future and aren’t available today.”
Rachel Tunnicliffe, an adviser at Oakworth Financial Planning, said picking funds is like picking horses.
"It's a bit of a gamble," she said, adding that the firm relies on in-house due diligence to narrow down fund selection.
As for regulatory definitions, anything that simplifies it would help, she said.
"Just call it one thing and stick to it."
sally.hickey@ft.com
