ESG remains a “minefield” for advisers and wealth managers

Advisers and wealth managers are frustrated by greenwashing and their trust in sustainability claims from funds has not improved, according to the ESG Attitudes Tracker from the Association of Investment Companies (AIC)¹.

Whereas last year only 1% of respondents to the AIC’s survey said they “completely trust” sustainability claims from funds, that figure is now 0%. On a scale of 1 to 5, most respondents (51%) rate their level of trust as ‘3’, indicating limited trust², according to the survey conducted by Research in Finance.

On greenwashing, one discretionary fund manager (DFM) commented: “It is dreadful and I think it is going to get worse. It is so bad. It infuriates me. I end up arguing with friends who work in other parts of finance.”

An adviser commented: “I am concerned about [greenwashing] because to recommend something on the basis that it meets my client’s desires for investment and then to subsequently find out that it didn’t is a dangerous position for me to be in.”

ESG ratings are not necessarily a panacea, with less than a fifth (19%) of respondents trusting them, and only 24% of respondents agreeing that they help to alleviate greenwashing concerns³. One respondent remarked: “‘There needs to be more industry standard regulations on ESG ratings. It’s a minefield.”

Despite these concerns, the percentage of advisers and wealth managers recommending sustainable funds has remained buoyant at 91% (the same as last year). Sustainable funds account for 17% of clients’ portfolios on average, versus 16% in 2022.

Most intermediaries (72%) expect demand for ESG investing to increase over the next year, though this percentage has fallen compared to previous surveys. In 2021, 91% of intermediaries expected demand to increase and in 2022, 80% of intermediaries did.

One adviser said: “A lot more of my clients are asking about ESG investments and I am attending more webinars and seminars on ESG to increase my knowledge and understanding around the area to be able to advise clients effectively.”

Intermediaries’ self-rated knowledge of ESG has improved, especially among DFMs, 47% of whom rated their knowledge as very good or excellent, up 16 percentage points from last year’s survey. Among advisers there was a more modest improvement, with 31% of respondents rating their knowledge as very good or excellent, up 4 percentage points.

A DFM commented: “I have seen growing evidence that integrating ESG factors into investment analysis can potentially lead to better risk-adjusted returns. Further, regulations around sustainability disclosures and practices are rapidly evolving. Proactive companies that address ESG issues are likely better prepared for regulatory changes than others.”

Does ESG help or hurt performance?

DFMs and advisers are split on whether ESG investing is more likely to help or hinder performance. Among DFMs, 41% think it is more likely to help performance, and 29% that it is more likely to be a hindrance; but among advisers, the pattern is reversed, with 24% saying it will help and 34% hinder.

Taking all intermediaries together, the percentage of respondents expecting a performance boost from ESG investing has reduced sharply from 47% in 2021 to 32% in this year’s survey.

One adviser said: “It is a difficult one because a couple of years ago I would have said that there is strong evidence that being more thoughtful about your investments along the ESG lines can deliver better returns... I know that is a little bit more of a difficult case to make because the last couple of years have not been positive for many of the stalwarts of ESG investing.”

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Notes to editors

1. The ESG Attitudes Tracker is the new name for the AIC’s annual research into investors’ attitudes and expectations around ESG investing, which is conducted by Research in Finance. There are two parts to this research: one covering private investors, which you can read about here, and one covering intermediaries (advisers and wealth managers), the subject of this release. The intermediaries research this year consisted of: (1) an online survey of 94 discretionary fund managers (DFMs), also referred to as wealth managers in this release, and 131 financial advisers; and (2) in-depth interviews with five DFMs and five advisers selected to represent a range of ESG views and experience. The fieldwork for the online survey was conducted between 19 July and 7 August 2023. The in-depth interviews were conducted between 2 and 11 August 2023. You can read about previous waves of the intermediaries research here and here.
2. Respondents were asked to rate their trust in sustainability claims made by funds on a 1 to 5 scale, where ‘1’ stood for “don’t trust at all” and ‘5’ stood for “completely trust”. In this year’s survey, 0% of respondents selected ‘5’, 11% selected ‘4’, 51% selected ‘3’, 28% selected ‘2’ and 5% selected ‘1’. In 2022, the respective percentages of respondents were 1%, 11%, 56%, 24% and 7%.
3. Respondents were asked to indicate their agreement or disagreement with the statement “I trust ESG ratings when researching investment funds” on a scale of 1 to 5 where ‘1’ indicated “don’t agree at all” and ‘5’ indicated “completely agree”. Only 1% of respondents selected ‘5’, 18% selected ‘4’, 34% selected ‘3’, 36% selected ‘2’ and 11% selected ‘1’. Respondents were also asked to indicate their agreement or disagreement with the statement “ESG ratings help to alleviate concerns around greenwashing”. On the same scale, 1% of respondents selected ‘5’, 23% selected ‘4’, 33% selected ‘3’, 30% selected ‘2’ and 14% selected ‘1’.
4. The Association of Investment Companies (AIC) represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s vision is for investment companies to be understood and considered by every investor. The AIC has 345 members and the industry has total assets of approximately £262 billion.
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