Asset Managers and Advisors May Be Overlooking Retail Investors’ Appetite for ESG Investing
April 12, 2021 — Boston
Managers and advisors need to listen to investors and find new ways to bridge the gap using awareness and education
There are several disconnects between the way financial advisors implement environmental, social, and governance (ESG) investing with their clients and the willingness of retail investors to embrace this manner of investing, according to the latest Cerulli Edge—U.S. Advisor Edition. For ESG investing to grow in retail channels, advisors and asset managers must work to bridge these gaps and ensure that they fully understand the appetite for ESG investing among retail investors.
In a 2020 survey, Cerulli asked financial advisors about the reasons preventing them from adopting ESG strategies in their client portfolios. By far, the most prevalent response was a lack of investor demand. More than half (58%) of surveyed advisors said this lack of investor demand was a significant factor preventing their adoption of ESG strategies, and an additional 14% reported that it was a moderate factor. Advisors maintain a widely held belief that demand for ESG strategies among their clients is a non-issue. In numerous conversations Cerulli held with financial advisors about ESG and responsible investing, most advisors reported that only a handful of clients had reached out to them about ESG investing.
In contrast, Cerulli’s survey of U.S. retail investor households found that nearly half (44%) of households would prefer to invest in an environmental or socially responsible way—far more than the “handful” of clients that advisors report proactively reaching out around the topic. “Based on our research, advisors generally underestimate the demand their clients have for ESG and should not interpret lack of proactive questions as a lack of client interest,” says Matt Belnap, senior analyst.
Another common misconception among advisors is that interest in ESG investing is limited to their high-net-worth (HNW) clients. This sentiment is also shared by asset managers. In a Cerulli survey, two-thirds (66%) of asset managers expected high demand from HNW investors (those with more than $5 million in investable assets). Another one-quarter of asset managers expect moderate demand from HNW investors.
Expectations of asset managers and financial advisors do not necessarily align with the preferences of retail investors, according to Cerulli’s research on the topic. More than half (56%) of households with between $100,000 and $250,000 in investable assets agree that they would rather invest in companies that have a positive social or economic impact. “By viewing ESG investing as merely a HNW solution, asset managers and advisors are discounting the interest from a broad swath of the investing public,” adds Belnap. “Both asset and wealth managers should seek to make ESG investing more accessible across wealth tiers.”
Ultimately, Cerulli believes there is an opportunity for wealth management home offices and asset managers to better educate financial advisors on productive ways to broach the subject of ESG with their clients. “If home offices can show advisors that their clients are generally open to discussing or implementing ESG solutions, and asset managers can provide them with tools and templates for successful conversations, fewer advisors will be held back by the ‘lack of client demand’ hurdle,” concludes Belnap.
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