Clients More Excited About ESG Funds Than Their Advisors

Despite the fact that clients are clamoring for information on environmental, social and governance (ESG) investments, financial advisors appear in no hurry to accommodate them.

According to a new study by Allianz Global Investors, just 14 percent of clients say their financial advisor has “discussed ESG as an investment strategy.”

Of those advisors and clients who have had conversations on ESG investments, 61 percent of clients “brought it up themselves,” the report stated.

Yet investors are ready to put their money where their mouths are on the topic. A July 2017 study by the Global Impact Investing Network found that investors planned to commit $25.9 billion in assets to impact investment deals this year, a 17 percent increase from 2016.

“This is a unique way for financial advisors to differentiate themselves,” said Kate Thompson, head of U.S. retail distribution at Allianz. “Investors may lack awareness of ESG strategies, but when they are informed, they put their money to work. And, it’s not just the younger generation interested in ESG investing, but investors of all ages.”

Others agree, noting that ESG investing has become a global phenomenon and very much in the mainstream these days.

“Globally, we are seeing a clear trend toward greater awareness, interest and adoption of ESG analysis and responsible investing,” said Judy Cotte, vice president and head of corporate governance and responsible investment at RBC Global Asset Management.

Performance a Problem

Sixty-seven percent of global respondents use ESG principles as part of their investment approach, RBC wrote in a recent study.

“By region, more investors in Europe (85 percent) than in Canada (73 percent) and the U.S. (49 percent) incorporate ESG analysis,” the study noted.

So why aren’t advisors talking to clients about ESG investment opportunities? Performance is one big reason, analysts say.

“The performance of ESG mutual funds lagged those of non-ESG mutual funds over full market cycles over the nine years I’ve studied ESG investment returns,” said Valerie Gospodarek, financial analyst and founder of VG Financial Consulting in Lafayette, Calif.

Then there’s the notion that mutual funds, in particular, are generally not designed to target any one specific social issue and instead aim more broadly, Gospodarek said.

“For instance, an investor may wish to invest in solar-generated power and not coal-generated power,” she said. “With a mutual fund, you cannot be so specific. Instead you must select a ‘green’ fund and hope that the fund portfolio manager invests in solar-power generation companies and not coal generation ones.”

Getting the requisite data and technology software to accurately assess ESG stocks and funds is a problem, too.

“While software is available to screen individual stocks, that software can be expensive and likely too expensive for independent advisors to acquire for the few clients per year that make an ESG investment request,” Gospodarek said.

Given those reasons, Gospodarek advises clients to look for investments “with the best potential for outperforming in the future and use any profits from their non-ESG investments to support their specific causes.”

At times, advisors have to tell clients that socially conscious investments may just be too costly, no matter how noble the investment intentions. Plus, there’s not much, profit-wise, for advisors, either.

“There are a couple of reasons advisors are not talking to their clients about ESG stocks and funds,” said Anjali Pradhan, a chartered financial analyst at Dahlia Advisory Group in Montreal. “For starters, they're not motivated financially, with no kickbacks or anything like that.”

'A Financial Price to Pay'

In addition, many advisors are simply not educated on ESG investing, he explained.

“These two facts mean that they'll try to discourage clients from engaging in ESG by convincing them that there's a financial price to pay by doing good,” said Pradhan, who specializes on working with women on money management issues.

A general lack of education on what ESG stocks and funds bring to the table is a recurring theme among advocates when asked why advisors won’t discuss ESG investments with clients.

“Advisors are ignorant of the state of the ESG industry,” said Andrew Bellak, co-founder of Stakeholders Capital, an RIA firm based in Amherst, Mass. “They should be embracing the opportunity rather than ignoring, avoiding and/or dismissing ESG discussions.”

Investment advisory firms also share the blame because they are reluctant to promote the ESG market.

“There’s a misperception that it’s riskier and underperforms,” Bellak said. “This makes it harder for individual advisors with big firms to ‘go it alone.’”

Then there’s a fear that ESG investment will underperform and that they’ll be embarrassed for taking an unnecessary risk.

“In general, that culminates in a fear that they’ll come off as ignorant and not an expert,” Bellak said.

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms. Brian may be contacted at brian.oconnell@innfeedback.com.

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