Sustainable investing - Is the Investment industry missing the message?

Investors crave knowledge as they seek to better satisfy their investment goals.

Huge amounts of time and effort is being spent on marketing Environmental, Social and Governance (ESG) - related product launches, educational materials and advertising campaigns by the asset management community, yet still most clients remain in the dark over the concept.

At The Private Office (TPO) we conducted a recent survey which revealed that while 85% of people are interested in the concept of investing in ESG investments, more than half of the sample had never heard of the term.

Perhaps more telling, of the 44% that claimed to have heard of ESG, only 56% accurately knew what it stood for, with suggestions of the G standing for ‘green’ and the E for ‘ethical’, for example.

TPO believes this reveals a huge opportunity being missed as it calls on investment managers, and the financial services profession at large, to refocus their efforts.

Unsurprisingly, the investment industry has been putting significant weight behind the theme. The number of ESG-related funds increased 40% over the past year¹ and European sustainable fund assets grew from €47bn in 2018 to €126bn in 2019. And in just the first two quarters of 2020, already £80bn has flowed into sustainable funds². Yet TPO believes even more assets could be redirected with the right advice, better serving clients’ interests.

The UK wide survey was carried out during the month of September, in which it asked more than 500 UK adults about their views, understanding, expectations and concerns around ESG. Of the sample, 85% said they were interested in ESG investments.

Two-thirds of the sample had total net worth of £250,000 or more, while 20% had net worth of more than £750,000.

Education needs to happen

Dean McSloy is a partner at TPO, financial planner and resident ESG specialist. He says: “We are seeing new funds launching all the time accompanied by huge marketing campaigns, but seeing these figures, it feels like education needs to happen at a more fundamental level.

“Many of these investors have an appetite to invest in ESG funds, but they’re being missed somehow. We need to lose the jargon, explain clearly what these funds really invest in, and where the benefits lie - now and in the future. What clients want and what they feel they can have might not be so far apart as a result. As advisers, it’s our job to help educate our clients but it feels like the industry is missing a really clear mark and potentially wasting a lot of effort.”

In a sector already plagued by too much jargon, McSloy believes there is a need to bring things back to basics.
He notes the disconnect between a professional sector that thinks ESG understanding is gaining pace, and survey results that tells a different story.

More people (57%) said their knowledge of ESG had stayed the same over the past three years, while 43% said it had increased.

Quashing the misconceptions of ESG

A common misconception is around the sacrifice of returns one must take when adopting ESG investment strategies. Despite years of work into quashing this myth, there is more work to be done.

Of the survey participants, 32% thought returns would be better than traditional investments. While encouraging, 22% said they thought returns would be about the same, 29% did not know, and 17% believed they would be worse. This audience split indicates a lack of clarity over comparable returns.

Much of this misunderstanding may be associated with the types of companies many people believe to meet typical ESG criteria. For instance, a sustainable fashion brand startup or small Scandinavian wind farm might be seen as ‘good’ at ESG, but some of the world’s largest companies can also be included.

Microsoft is one of the leading tech giants in the world, generating incredible returns for its shareholders, yet also scores highly for prioritising climate and social concerns, similarly Disney and Google parent Alphabet are demonstrating positive ESG qualities.

Industry needs to give consumers what they want, not what they think they need

McSloy was keen to highlight the advances being made in the institutional pensions space, where reporting rules are increasingly demanding a greater focus on ESG principles, including stewardship, ethics and the environment.

The survey revealed a strong majority of 71% who said it mattered to them whether their pension was investing in sustainable, responsible companies.

McSloy says: “Huge levels of wealth could be working harder to ‘do good’ for society and the planet with just a little rethinking. The industry needs to start giving consumers the information they want, rather than the information we think they need.”

NOTES

About the research: The online survey was conducted between 5/9/20 to 12/9/20 using an online research company, Dynata. All respondents were aged 18-84 across all UK regions and respondents had to have at least £20,000 available to invest or save. The survey polled 503 UK adults.

The views, thoughts and opinions expressed in this article belong solely to the author and do not necessarily reflect those of The Private Office. The content is for general information only, does not constitute individual advice and should not be used to inform financial decisions. Most importantly, investment returns are not guaranteed and you may get back less than originally invested; past performance is not a guide to future returns.

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