Advisers Expect Increased Demand in ESG
Art by Alex Eben Meyer
More than one-third—35%—of asset managers have made introducing environmental, social and governance (ESG) investing a high priority, and another 57% say they are placing a moderate level of priority on the task.
Together, this makes for a full 92% of asset managers on the path to or considering offering ESG investing options, says the December 2017 issue of “The Cerulli Edge – U.S. Edition.”
Asset managers are making this move because they believe the demand for ESG investing will expand beyond institutional investors—traditionally apt to be religious-affiliated institutions or nonprofits—to include more retail investors. Already, 18% of advisers have incorporated ESG into their practice, and another 24% expect increased ESG demand over the next 12 months.
Cerulli also expects other institutional investors, including public defined benefit (DB) plans, endowments, foundations and health care institutions, to embrace ESG investing.
“Investors’ interest is beginning to shift from simply excluding ‘sin’ stocks to seeking investment strategies that incorporate ESG criteria through integration, best-in-class/positive screening, or impact investing, among other methods,” says Brendan Powers, senior analyst at Cerulli. “As ESG strategies are gaining traction in the institutional space, consultants are recognizing this burgeoning demand. Adoption of ESG strategies has largely been concentrated among institutional asset owners, but retail demand is expected to grow as next-generation investors seek to align their portfolios with their personal values.”
Some asset managers are integrating ESG screens into all of their products, while others simply make ESG analysts available to portfolio managers, Cerulli reports.
Among advisers, multi-family offices have been leading the ESG movement, with 33% making use of this type of investing and planning to increase their allocations. An additional 17% plan to start using ESG in the next 12 months.
A further potential catalyst, Cerulli says, is Millennial high-net-worth investors. It learned that many broker/dealer (B/D) home offices are ramping up the ESG capabilities on their platforms due to demand from younger investors. “With the increased availability of data from providers such as MSCI, Bloomberg, Morningstar/Sustainalytics and the Sustainable Accounting Standards Board, among numerous others, managers believe that ESG integration will be the baseline of how portfolios are constructed going forward,” Cerulli says.
Even when confronted by so much interest, many advisers still need to be educated about ESG, as many think it necessarily drags down performance.