New research concludes that IFAs want additional ratings to support client interest in environmental, social and governance (ESG) products.
The headlines from the report are that:
- 57% of IFAs would like a greater supply of ratings for ESG products;
- Over a third (34%) of IFAs say limited understanding of ESG issues and potential impact on investment portfolios impacts client demand for ESG products;
- Increased interest in social concerns driving interest in ESG say 33% of IFAs.
The research was conducted by HSBC Global Asset Management and discovered that sustainable investment continues to be in demand. The study found that interest in social concerns, such as diversity, human rights, consumer protection, and animal welfare is the main reason for client demand for investments explicitly incorporating ESG issues.
One in five (28%) IFAs believe interest is due to a combination of factors, rather than a single reason. However, IFAs still want more information, with 57% saying they would like more product ratings.
Ratings need to be improved
The research found that only 13% of IFAs think that the current ratings available for ESG products are sufficient. When asked if they think there is enough information in the market when it comes to ratings of ESG products, over half of IFAs surveyed (57%) say they would like a greater supply of ratings.
ESG implementation varies by investment manager and the report said that it can be difficult for IFAs and their clients to tell which products have more robust sustainable investment approaches. With many investors looking at aligning investments to their personal values, the ability for IFAs to demonstrate which products do so most rigorously is crucial.
Good investment opportunities but limited understanding
Amongst IFAs who said that they have seen less, or no change in demand over the past year, only 9% stated that investing in an ESG strategy might mean sacrificing returns, demonstrating that the vast majority of IFAs believe that ESG strategies are good investment opportunities that can help meet client objectives.
A limited understanding of ESG issues and the potential long term impact on investment portfolios is the single main reason impacting client demand for ESG products (34%), according to survey respondents. The impact ESG issues have on portfolios can be substantial. As an example, research by Mercer, looking at a 40-year time horizon, found that the risks associated with climate change are estimated to result in a return loss of 0.82% per year for developed equities. This means issues such as climate change is no longer just a potential investment risk in the distant future – it already is one today.
Table 1 – Reasons affecting demand for ESG products
|Limited understanding of ESG issues and potential impact on investment||34%|
|No need to take ESG issues in to consideration when investing||9%|
|Investing in an ESG strategy might mean sacrificing returns||9%|
|There is a lack of ESG investment products available – not enough products meet client needs||7%|
|A combination of all of the above||38%|
Investor values driving interest in ESG products
According to one third (33%) of IFAs, increased interest in social concerns, such as diversity, human rights, consumer protection, and animal welfare is the main reason for increased ESG demand. However, one in five (28%) IFAs believe the interest is due to a combination of factors, rather than a single reason.
Table 2 – Drivers of investor interest in ESG products
|Increased interest in social concerns, such as diversity, human rights, consumer protection, and animal welfare||33%|
|Increased number of ESG investment products available – it’s easier to find ESG products that meet client needs||17%|
|Increased interest in environmental issues, such as climate change, nuclear energy, and sustainability||11%|
|Increased interest in governance of the companies invested in, such as management structure, employee relations and executive compensation||6%|
|A combination of all of the above||28%|
Daniel Rudd, Head of UK Wholesale, HSBC Global Asset Management, said: “Investor interest in ESG issues continues to grow rapidly. However, what we’ve found is a considerable lack of information to adequately explain these issues and their impact on companies and in turn, investments. Given the complex and diverse ways of implementing ESG, it can be difficult for financial advisers to effectively inform their clients without detailed information and robust ratings.
“Our research shows that there is a significant opportunity to better equip IFAs. We will continue to strive to educate our clients and the markets about the relevance of ESG to long-term economic performance and the sustainability of the financial system.”