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.

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.

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.