Rather than asset managers creating environmental, social and governance (ESG) products, interest in ESG will be driven primarily by wealth managers building platforms to support ESG, according to Cerulli Associates.
“The theme of ESG investing is not a new one for the asset management industry,” says Bing Waldert, managing director at Cerulli. “Products and strategies that purport to invest more ethically have long been a part of the industry. Early products were relatively simplistic, screening out ‘sin stocks,’ such as tobacco or gun stocks. However, growing awareness of climate change and social issues has revived interest in ESG and socially responsible investing (SRI).”
Waldert adds: “As with other product trends, asset managers are inventing and adapting products. However, unlike other past product introductions, wealth management firms are creating platforms and asset allocation models for investors to allocate to ESG investments.”
Demand for ESG investing is coming from both younger investors and wealthy investors who want to make a difference with their wealth. Cerulli says that 45% of U.S. households have an interest in ESG investing but that flows into these products to date have been modest—suggesting an untapped market. Furthermore, 47% of those with more than $5 million in assets express a preference for ESG investing.
Data on ESG investing from third-party vendors is improving, Cerulli says.
“Interest in offering ESG and sustainable investing platforms is not limited to the wirehouses and private banks,” Cerulli says. “Custodians working with registered investment advisers (RIAs) and other independent advisers are creating models and ESG offerings to serve their clients as well.”
Nevertheless, more than half of advisers do not plan on using ESG products. When asked why, they say they believe they do not perform as well as other investments. “Greater adoption of these products will require a reframing of advisers’ conversations with clients,” Cerulli says.