Growing public concern and advocacy for environmental and social issues has led to the rise in sustainable investing. Environmental, social, and governance (ESG) investing has emerged as a leading practice among the sustainable investing landscape.
Growing investor interest has placed significant pressure on wealth managers who attempt to meet demand for ESG solutions while navigating the realities of a formative investment landscape. Asset managers are responding to investor demands, as seen by BlackRock’s commitment to hold companies more accountable when managing ESG risks. In addition, ESG fund flows are showing strong resilience during the COVID-19 era. Wealth managers who embrace today’s sustainable investing challenges have the opportunity to develop a significant competitive edge and secure long-term market relevance in this growing space.
Increasing Client Demand for Advice
Both retail and institutional investors are increasingly seeking to limit their investments' adverse impact on global sustainability. You can find evidence of this approach by the growth in ESG AUM over the last decade. Despite limited and inconsistent corporate sustainability disclosures, asset managers have responded with numerous sustainability branded products.
Wealth managers are increasingly being asked to educate and guide their clients through this new investment landscape while managing the limited access to reliable data. Even though a large amount of data is available to wealth managers, it is currently not regulated and, therefore, inconsistent.
Closing the Interest to Adoption Gap
Despite significant momentum in ESG investing, retail investor adoption is lagging. Many investors express interest in ESG investing, but many remain on the side lines when it comes to investing dollars. This lag can be attributed to investment performance concerns, limited product options beyond mutual funds (e.g., 401k), and investor’s effort required to understand this complex landscape.
From investor education to portfolio rebalancing, wealth management professionals need to be ready to help their clients turn interests into concrete investment decisions.
Emerging ESG support capabilities
The demand for experienced ESG professionals has increased in lockstep with client demand. As such, many firms are investing in data, analytics, reporting infrastructure, and advisor education to allow for full ESG integration into their wealth management practices. Firms, such as Northern Trust, are investing in high caliber ESG professionals to help develop a more robust ESG platform by educating advisors, developing innovative products, and employing unique strategies to meet clients’ increasingly specific investing needs.
Wealth managers have increasingly been adopting new training and tools to help them navigate the space, engage relevant conversations with their clients, and provide differentiated value propositions.
Areas of Focus
Wealth management professionals should be focused on advisor education, investor engagement, ESG product enablement, and data accessibility to remain at the forefront of this growing market.
Advisor Training: Educate advisors on ESG principles and how to implement them.
Training will help advisors gain a fundamental understanding of the sustainable investing landscape; grasp market dynamics and trends, generate and manage investor engagement, and integrate ESG into the portfolio management process.
Investor Engagement: Generate and manage ESG interest
Investor engagement plans that leverage a combination of communication and training activities will enable wealth managers to capitalize upon the market momentum, create investor value, and deepen client relationships.
ESG Product Enablement: Develop an ESG product offering
Despite the lack of ESG data transparency and consistency among products, an increased number of sustainability branded products are entering the market. Wealth managers need to rationalize the current landscape and build an offering that meets clients' demands and are comfortable selling.
Data Accessibility & Transparency: Streamline access to available data
While a race is still underway to provide a ‘single point of truth’ platform for ESG data, emerging and established financial data companies provide thousands of ESG metrics and scores. Wealth managers need to secure seamless access to available data to confidently engage with their clients and help them make sound sustainable investment decisions.
ESG Fund Flows Increase During COVID-19
After a record year in 2019, which saw $21 billion flow into ESG funds in the U.S., investors continued to plow dollars into responsible investing products during the first quarter of 2020. Roughly $10.5 billion flowed into ESG funds as of the end of March, setting a quarterly record for net flows into responsible investments. While investment did taper off as the crisis intensified, flows remained positive in all three months to start the year. Passive funds were investors’ vehicle of choice, with a whopping 94 percent of all investment flowing into index funds.
Despite the expectation that the effects of COVID-19 will linger until the end of the year, flows into ESG products will likely eclipse those of 2019. The continued growth of ESG during a global crisis demonstrates the strength of investor appetite for such investing. As such, we expect wealth managers to continue to adapt their product suites and advisory models to meet increasing investor demand.
A strong ESG and impact investing framework and platform provides wealth management firms with a solid foundation to achieve a competitive advantage in winning new clients and retaining existing clients. Although there is a lack of U.S. ESG and impact investing regulation in sight, wealth management firms should not remain passive and aim to be compliant and transparent about their investment strategies, principles and policies as client demands increase.
Robert Norris is managing principal in the wealth and asset management practice at Capco.