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Error tracking is important for investor comfort

Tracking errors and fund performance are important for mitigating investor worries about the potential for performance drag related to ESG screens.

Another reason for hesitancy among investors may be the lack of connection between ESG strategies and strong investment performance. Only 10% of advisors say they offer these strategies because they believe socially responsible companies will outperform their peers.

Unsurprisingly, fund performance remains a top priority for both investors and advisors. When it comes to forming an asset manager brand, advisors overwhelmingly say fund performance is their single most critical consideration, far outpacing third-party ratings or firmwide approaches to ESG investing.

Although ESG strategies are becoming more popular, they seem unlikely to become a higher priority for investors than returns. But even if advisors don’t necessarily expect ESG considerations to help returns, they see the importance of making sure they don’t hurt them—and of conveying that information to clients. Most firms (82%) say that the ability to monitor tracking errors is at least somewhat important for determining appropriate SRI solutions.

Introducing error tracking can allow investors to see how potential investments perform against standard benchmarks, which can make ESG investing less intimidating, according to Le Berre. “This is an attractive proposition that allows clients to invest with values without necessarily making a performance bet in either direction,” she says.

Although interest in ESG investing is rising, advisors still have an important role to play in educating investors about what options are available. By anticipating common investor concerns and building flexibility into their solutions, advisors have an opportunity to position themselves ahead of their competitors in an area that is increasingly important to their clients.