Environmental, social and governance (ESG) investing has become a big talking point over the last couple of years for the financial advice industry.
But the sector is still having trouble integrating it with the IFA market.
Last year, an Aviva and Lang Cat report found 61% have an ESG process in place for onboarding all clients, and a further 23% use an existing process if the client asks for it.
But it was a different picture when considering existing portfolios, with just under half (49%) saying they never give clients an ‘ESG lookthrough’ on their existing investment holdings. Of the remainder, only 7% do this as standard for all clients, a further 11% said they would do it for most, and 33% for some.
Across the Atlantic, some 83% of millennials in the US said they would leave their adviser if they were not sufficiently knowledgeable about ESG.
International Adviser spoke with Progeny, Lawsons Network, Blacktower, NextWealth and Core-Asset Consulting about advisers’ ESG confidence, education and training and if there is a risk that clients might be mis-sold ESG products due to a lack of adviser understanding.
According to Heather Hopkins, managing director at NextWealth, many advisers report a lack of confidence across the ESG advice process.
She said: “Our 2022 report on sustainable investing found that adviser confidence is low relating to ESG, with only around half of the 200 financial advisers surveyed for the report saying they are confident or very confident about the steps of the advice process relating to sustainable investing, including understanding client preferences, researching products, recommending products and reporting to clients.
“This highlights a significant gap and suggests more support is needed from product providers. The biggest challenge remains ongoing reporting on sustainable-investing objectives, where only 36% of advisers reported being confident or very confident. One fifth said they are not confident at all.”
Hopkins believes that more collaboration is required to improve ESG education.
“Until all areas of the industry come together to agree terminology and definitions, it will be very difficult to improve education,” she added. “Our research shows that use of the term ESG has different meanings for different groups. Investment providers use it to describe an objective measure of risk but many advisers regard it as a label for sustainable investing. Using it for both is creating confusion.
“Asset managers often tell us their funds are fully ESG integrated and that ESG considerations are built into their decision-making process. When an adviser talks to a client about sustainable investing, the conversation isn’t about the ESG risk factors that might influence the future price of a stock or fund.
“Instead, it’s about making choices about how capital is deployed to align more closely to values. This distinction is hugely important and is the reason we have changed the ESG label to sustainable investing in our tracking reports.
Sarika Dhanjal, head of advice quality at Progeny, said that advisers face a number of challenges when factoring in ESG.
“Many advisers have found it difficult to deal with the demands of day-to-day work alongside educating themselves on ESG, especially with a number of things coming over the horizon, including Consumer Duty,” Dhanjal said.
“Sustainable investing is an increasingly complex area − there are a huge number of sustainable-investment solutions out there for investors to choose from but selecting the right solution to support a client’s values and objectives can be a challenge for advisers.
“One key issue is that there is currently not enough easily comparable information around products’ sustainability credentials, especially in relation to the social and governance aspects. The proposed product labelling under the forthcoming sustainability disclosure requirements should help to build better trust and confidence in the sustainable-investment market, however.
“Another issue is that while an adviser can have a discussion with a client about their outlook on sustainable investing, there is currently no specific measure to accurately assess what the client’s attitude to this investment approach is.”
‘Real need for good quality training’
On ESG education and training, Dhanjal added: “The financial services industry is ever changing and many training and compliance providers seem to focus on areas such as defined-benefit transfers or Consumer Duty.
“My hope is that the proposed sustainability disclosure requirements will help to change this by introducing a much-needed framework around product labelling and disclosures.
“There is a real need for good quality training on ESG. This needs to cover the spectrum of sustainable investing and the skills required to explain the key terminology to clients. It also should cover the questions that need to be asked, to support any sustainable investment decision and, equally, to support recommendations where the client did not wish to consider this approach.”
Dhanjal believes there is scope for a mis-selling problem to arise, due to lack of training and understanding, and that there is also the possibility of an opportunity cost for the client.
She added: “The confusing range of terminology, lack of standardised reporting frameworks and resulting concerns about ‘greenwashing’ all contribute to possible future mis-selling issues. The greater issue may be that clients who might have wished to make sustainable-investment choices were not prompted to have this conversation by their adviser.”
Betsy Williamson, chief executive at financial recruitment company Core-Asset Consulting, observed that advisers are having to adapt to the attitudes and values of a different generation and that there is a training need.
“For many private wealth management firms, the challenge is how to build relationships with future generations whose habits and principles are different from that of the prior generation,” Williamson said.
“The growing necessity of focusing on ESG issues has called attention to a knowledge gap in the industry, bringing out the importance of financial sector professionals having the necessary training.”
A spokesperson from the Lawsons Network Investment Committee, commented: “The mind-boggling amount of information available from asset managers is impressive but does not necessarily amount to education and training on ESG. Time spent researching ESG will be useful for explaining what ESG investing is designed to do and to help dispel the myth of inferior returns.
“Ultimately, the most important job of an adviser is to fully understand what a potential ESG client is looking for and working with their wealth manager or asset manager, to avoid the possibility of mis-selling of an investment mandate.”
John Westwood, group chairman at Blacktower, said: “Just as firms and advisers are expected to keep up with changing regulations, it is also their responsibility to ensure that they receive adequate training on new, relevant investment vehicles so that they can offer a comprehensive range of services to their clients.
“Advisers and firms have had a considerable amount of time to familiarise themselves with how ESG investments work and build the confidence needed to offer them to clients. Although it might be tempting to turn a blind eye to this development in the world of investing, it is crucial that firms adapt to ensure that they’re still offering their clients the best option for them.
“As demand for ESG increases, those who have not acclimatised will be left behind.”