Advisers risk losing clients if they fail to acknowledge and factor their environmental, social and governance (ESG) preferences into their recommendations, Jonathan Yousafzai, head of ethical investment at Thesis Asset Management, has warned.
But while these funds are gaining traction with some investors, Yousafzai argued it has taken time for some in the industry to acknowledge the significance of ESG investing, particularly when it comes to the younger generation.
He said: “I believe ESG is becoming more and more mainstream due to increased consideration of ethics as well as profit. Practitioners ignore ethical investment at their peril; it has gathered a great deal of momentum. All the investment managers at Thesis are now discussing ethical considerations with their clients.”
Adviser frustration
However, recent research by HSBC Global Asset Management showed that advisers are seeking more information on ESG but are frustrated by the current ratings available to them.
ESG is becoming more and more mainstream due to increased consideration of ethics as well as profit
The study found that 57% of IFAs would like a greater supply of ratings for ESG products, while just 13% believed the current ratings are sufficient.
Among IFAs who said that they had seen less or no change in demand over the past year, only 9% stated that investing in an ESG strategy might mean sacrificing returns, suggesting that the vast majority of IFAs believed ESG strategies were good investment opportunities that could help meet client objectives.
Table 1 – Reasons affecting demand for ESG products
| Reason | % |
| Limited understanding of ESG issues and potential impact on investment | 34 |
| No need to take ESG issues into 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, was the main reason for increased ESG demand.
One in five (28%) believed the interest was due to a combination of factors, rather than a single reason.
Table 2 – Drivers of investor interest in ESG products
| Reason | % |
| 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.”
Corporate responsibility is the norm
Yousafzai added: “In financial services, when you are speaking to clients, you should naturally touch upon ESG. Advisers or investment managers who avoid that conversation are running the risk of losing some of their client base. The body of opinion behind investing this way is too strong now to ignore.
“When I started in this part of the industry nearly 30 years ago, companies did not even return a questionnaire about their ethical policies. They simply were not interested.
“Now most blue-chip firms will have a corporate social responsibility (CSR) manager and policy, and know that they will be held to account if they don’t have one. Companies that are commercially astute will have CSR objectives as the norm, whereas those that don’t are seen as behind current thinking these days.”
