Data & Research May 17, 2023

Advisers, Participants Skeptical of ESG Investments, but Asset Managers Are Not

Greenwashing by investment funds has contributed to negative rhetoric about ESG, but the practice remains a top initiative for U.S. asset managers, say experts at Cerulli.

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Almost half (44%) of U.S. financial advisers said they were hesitant to even address the topic of environment, social and governance investments with clients, while 41% of 401(k) plan participants are unfamiliar with or have never heard of ESG investing, according to new research from consultancy Cerulli Associates.

“In the broader retail investor sphere, this combination of lack of familiarity and often agenda-driven negative rhetoric makes the ESG space a ‘third rail’ for many advisers,” Cerulli stated in a research report released Tuesday. That sentiment stems in part from investment funds increasingly being under scrutiny for “greenwashing,” the practice of intentionally presenting a false impression that a company and/or its products are more environmentally sound than they really are, according to the Boston-based firm.

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While greenwashing has driven a negative investor perception of ESG, Cerulli survey data indicated that a lack of education on the topic is contributing to the confusion.

In spite of these findings, many in the asset management industry, may be embracing ESG investing. In the U.S., 58% of manager respondents considered ESG a top product development initiative. Despite reservations from plan participants and advisers, Cerulli experts expect asset managers to remain dedicated to development, sales and marketing of ESG products.

“Overall, Cerulli’s research reflects an industry largely unswayed by negative rhetoric surrounding the topics and concepts related to ESG investment,” said David Fletcher, associate director of editorial production at Cerulli, in a statement. “By and large, sustainability and the overarching themes of ESG investment are already ingrained in the asset management industry. The challenges firms face in implementing ESG investment initiatives are pain points that will likely be viewed in retrospect as necessary steps in the legitimization and long-term success of these goals.”

ESG-branded investments were almost always (93% of the time) presented as a stand-alone option on a core retirement plan investment menu, rather than as the plan’s qualified default investment alternative, when provided in consultant-intermediated plans, according to the survey. Offering ESG products as stand-alone options on the core lineup for self-directed investors was considered a practical approach to distributing these investments to the defined contribution market.

The majority of U.S. asset managers also support more clearly defined regulation of and guidance on ESG investing. Seventy-three percent said they believe the Securities and Exchange Commission should be responsible for setting standards for public companies’ ESG disclosures. Meanwhile, 58% of respondents said the SEC should be tasked with setting ESG standards and product definitions for asset managers. Several markets in Asia have set more rigorous disclosure norms for funds purporting to be ESG, including Japan, Taiwan and South Korea, according to Cerulli. Some of the new regulations include disclosure of their ESG focus, thematic approaches followed and minimum assets that must be deployed in sustainable investments, as well as other conditions.

Cerulli’s white paper, “Global State of ESG: Forging Ahead Amidst Heightened Regulatory Scrutiny and Investor Skepticism,” draws on responses from asset owners and managers polled during the past year.
Deals & People May 17, 2023

Smart Raises $95M in PE Funding, Eyes Further Acquisitions

Aquiline Capital leads a funding round for the U.K.-based retirement technology firm with operations in the U.S., Europe, Middle East and Asia.

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Retirement financial technology firm Smart Pension Ltd. has snagged another $95 million in private equity funding to expand its global operations and fuel more acquisitions, the London-based firm announced on Monday.

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Aquiline Capital Partners LLC, Chrysalis Investments and Fidelity International Strategic Ventures contributed to the Series E fundraising round for Smart, which partners with advisers, asset managers, plan sponsors, recordkeepers and third-party administrators on retirement plan solutions, including managed accounts and retirement income. The funding will go to global growth across Smart’s operations in the U.S., Europe, Asia and the Middle East, along with funding acquisition plans, according to the announcement.

Smart, whose U.S. operations are based in Nashville, Tennessee, launched in the U.S. in 2020 with investment from JP Morgan Chase & Co., Legal & General Group plc and Barclays. The firm has been targeting growth in the U.S. retirement plan market since the original Setting Every Community up for Retirement Enhancement Act of 2019, most recently starting a pooled employer plan with Transamerica Corp. in March 2023. Its strategy of offering solutions after retirement-related legislation is similar to its founding in 2014, when the firm started up after the U.K. rollout of mandatory workplace retirement plan enrollment, according to the announcement.

Smart’s growth has been driven in part by “global demand for modern, digital retirement savings technology” and strategic mergers and acquisitions, including the 2022 acquisition of Stadion Money Management, a managed account provider to savers, according to the announcement. Private equity firms have been pouring funding into the retirement and wealth management space in recent years, often driving M&A activity, according to tracking by M&A consultancy firms such as Echelon Partners.

The funding will go toward retirement coverage solutions that differ by the market, says Jodan Ledford, CEO of Smart in the U.S. Within his focus area, Ledford says one push for growth will be bringing more PEPs to market to serve an increase in small and midsize employer retirement plans. The CEO says that, between state mandates and incentives from the SECURE 2.0 Act of 2022, he anticipates in the range of 1 million new retirement plans coming online in the next 10 years, with many being served by PEPs.

“We’re in the position of being able to provide the technology that works to capture this flow of plans in the current market with providers, as well as to provide tools that help make them go faster and work with these plans,” Ledford says. “It’s an area that is poised for growth.”

Another area expected to benefit from the funding is Smart’s work as a facilitator for retirement income solutions, ranging from managed accounts to custom target-date funds that provide fixed-income annuity options, according to Ledford.

“There is a large population bubble, in respect to the Baby Boomers, who are in retirement or approaching retirement,” Leford says. “They used to have DB plans, and historically there have been a lot of rollovers to IRAs facilitated by plan sponsors. … In the U.S., we believe that there will be more of a need for a mass market solution.”

Ledford says Smart will have some announcements this year concerning both new PEPs and retirement income options the firm is supporting. He noted that, through the acquisition of Stadion, the firm has a robust platform for managed account offerings.

In the announcement, Smart forecasted that the funding round would help it boost its assets under management to $12.5 billion by the end of the second quarter, up from $7 billion.

“Smart’s retirement technology leadership, coupled with Aquiline’s deep experience in the retirement technology industry across the U.S. and Europe, makes this a compelling investment, as does the growing global need for better retirement savings technology,” Jeff Greenberg, chairman and CEO of Aquiline, said in a statement.

Prior to this funding round, Smart raised $165 million in Series D funding in 2021, was led by Chrysalis Investments.

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