Despite increasing interest in investments focused on envi- ronmental, social and governance issues among investors, advisorsand asset managers, many advisors stillare reluctant to offer ESG strategies inclient portfolios, according to a recentreport from Cerulli Associates.
Fifty-eight percent of more than 1,000advisors surveyed cited little investordemand for their lack of ESG strategies,while 44% of 1,200 retail investor households surveyed said they preferred toinvest in an environmentally or sociallyresponsible way. Eighty percent of investors reported a preference for investingin companies that are leaders in environmentally responsible practices.
The Cerulli survey also stated that advisors tend to limit ESG investing to theirhigh-net-worth clients, which Cerullidefines as investors with more than $5million in investable assets, leaving out the56% of households with investable assetsbetween $100,000 and $250,000 who saidthey would rather invest in companies thathave a positive social or economic impact.
“For responsible investing to fullydevelop and grow in retail channels,advisors and asset managers must fullyunderstand the appetite for ESG investing among retail investors. … Both assetand wealth managers should seek tomake ESG investing more accessibleacross wealth tiers,” the report notes.
Biggest Fund Managers Favored
When advisors do invest client assets
in ESG investments, they tend to favor
large asset management firms like
Vanguard and BlackRock’s iShares divi-
sion. When asked to rank the firms that
had the best reputation for providing
quality ESG offerings, about half the
advisors surveyed selected Vanguard
and 44% chose BlackRock/iShares, even
though Vanguard has only five ESG
funds available to U.S. investors and
BlackRock has 28.
Moreover, only about 16% of advisorsrated Calvert (now part of Eaton Vance,which has been acquired by MorganStanley) and Parnassus as having thebest reputations for quality ESG offerings. This despite the two firms having invested exclusively in sustainableinvestments since their beginnings,which date back to 1976 for Calvert and1984 for Parnassus.
‘The reality is that, as in other caseswhen considering unfamiliar producttypes (e.g. active exchange-traded funds,alternatives), advisors often look to thelargest, most established brand namesas a proxy for quality,” according to theCerulli report. Fees also are a factor foradvisors and “the largest low-cost providers have gained a solid foothold withmiddle market and affluent investors,”according to Cerulli.
“Advisors need help framing ESGinvestment decisions,” the Cerullireport notes.
Many advisors find it difficult to
benchmark ESG strategies and define the
boundaries of those strategies, and they
lack the time and resources to do their
own research into ESG strategies. On top
of those difficulties is the “ever-expand-
ing range of options that can quickly lead
to decision fatigue,” according to Cerulli.
Asset managers can help advisors adoptthese strategies by educating them on thebenefits of ESG integration and the bestways to broach the subject with clients,and by differentiating their own investment solutions from others. Direct indexing also can help bridge the ESG dividebetween advisors, their clients and assetmanagers, according to Cerulli.
ENVESTNET LAUNCHES ENHANCED
Envestnet has launched an enhancedESG due diligence framework to evaluate equity and fixed income strategies onits platform. The enhanced frameworkfocuses on data from four key areas collected from asset managers via interactions and questionnaires involving ESGmanagers: firm-level ESG policies, ESGintegration in the investment process,reporting on impact and engagement onESG issues.
These investments have become thefastest-growing segment of Envestnet’smanagement money universe, increasing 98% in 2019 and 81% in 2020, according to the firm. As of year-end 2020, theEnvestnet ecosystem has more than $20billion in ESG assets under managementor administration in over 335,000 clientaccounts that are overseen by more than17,000 advisors.
Bernice Napach can be reached email@example.com.
By Bernice Napach
How to Bridge the ESG Divide
Advisors need help from asset managers on how to frame these
investments for their clients, the Cerulli report notes.