The Value of ESG in Today’s Adviser World

Commissioned by Rathbones |
Researched by Core Data Research

Welcome to the first instalment of our 3-part series sharing new research from Rathbones on ESG investing and its significance for advisers. In this series, you will learn:
1

How much the ‘ESG world’ has already changed for advisers

2

What impact ESG is having on advisers’ business growth

3

If advisers are prepared for ESG as the mainstream

1

Part 1: How much has the ‘ESG world’ already changed for advisers?

INTRODUCTION

The speed of societal change driven by ESG (Environmental, Social and Governance) seems inexorable, accelerated by the global pandemic, which is fuelling a reframing of behaviours by all echelons of society. The climate emergency, growing scrutiny of companies’ practices, and fast-changing consumer ethics and behaviours typified by the ‘Thunberg effect’ are together exerting upward pressures on the corporate sector. And in turn asset managers, investment managers, advisers and investors, as each responds to opportunity and need.

By 2025, Millennials will make up an influential 75% of the workforce*, with the pension, investment and wider spending power that accompanies this position. With this generation at the forefront of the demand for societal, business and ethical change, anybody still thinking ESG is a short-term fad has now had their final wake-up call.

Today, £17.4 trillion of assets globally are already classed as adopting responsible investment strategies, a 25% increase since the previous review in 2014. Sustainable funds attracted £31 billion in net inflows in the first half of 2019 alone**.

* https://www.ftadviser.com/investments/2020/05/15/esg-trends-translate-from-us-to-uk-assets/

** Source: CoreData: Advisers and ESG (Environmental, Social and Governance) Investing, The influence of ESG on advice businesses (P4)

Lack of industry data

But what of the adviser sector? How mainstream has the adoption of ESG into adviser investment practices become in 2020? And in what ways is the growth of ESG impacting businesses and client relationships?

Most importantly, what value is adoption bringing to advisers? Although understanding this is commercially critical for our industry, there is surprisingly little empirical data available to direct and inform thinking.

To understand what level of value has been created to date for advisers by ESG adoption, Rathbones recently commissioned a new study through specialist financial services research house, CoreData.

Within it, the outcomes for two groups, of 50 advisers each, were compared. One populated by advisers with 20% or less in ESG investments (‘non-ESG adopters’), the other with a significantly higher 60% or more allocation (‘ESG advisers’), providing robust findings on the value adoption has brought adviser businesses to date.

To what extent has the ‘ESG world’ already changed for advisers?

We began by asking both the ‘ESG adviser’ and the ‘non-ESG adviser’ where they stood in relation to ESG.

There was universal consensus that the tipping point for ESG is already behind us. 94% of non-ESG advisers ‘agreed’ or ‘agreed strongly’ that “Business and society are changing, so ESG factors will become increasingly important to investment performance”, with 100% of ESG advisers agreeing ‘very strongly’.

We then further sought to consider the extent of ESG’s normalisation within the adviser world, by understanding what percentage of advisers currently discuss ESG investing with their clients. As well as probing how recently their ESG client conversations started taking place.

Data reveals that the mainstreaming of ESG client conversations appears to have already taken place. Just 3% of the combined total (and 6% of the non-ESG group) still don’t talk to their clients about ESG investing. The greatest proportion appears to have begun discussions in the past one to five years, with a high 60% of non-ESG advisers starting then – and a further 14% of non-ESG starting conversations in the past year.

Both groups also confirmed that client adoption of ESG investment had grown significantly in the past five years. While 40% of the non-ESG group’s clients had no ESG investments five years ago, this was true for just 8% of their clients today.

Figure 1: Please state whether you agree or disagree with the following statement about the relationship between ESG investing and performance.

Business and society are changing, so ESG factors will become increasingly important to investment performance.

Figure 2: How has the proportion of your clients adopting an ESG/sustainable investment approach changed over the last five years and what are your expectations for the change in the next three years?

Looking forward, 82% of non-ESG advisers expect client adoption of ESG investments to rise further between 10-75% penetration in the next three years. For the ESG group, 70% of their number confirmed that a significant number of their clients have already adopted ESG investments (up from 32% five years ago), and predict this to rise to 98% in the next three years.

“It is very rare to find someone who says ‘No, I am not interested in ethical investing.”

Non-ESG Adviser £30-50m

How do advisers believe ESG will affect their business in the next five years?

Both the ESG and non-ESG groups recognise the increasing importance of the role ESG will play within their business over the next five years. While this is to be expected from the ESG group (58% predict it being significantly more important), a sizeable 38% of non-ESG advisers predict the same reality, with a further 62% of this group seeing it as ‘somewhat more important’.

Allocations predicted to rise significantly

Irrespective of each group’s distinct adoption levels today, both sets of advisers believe their ESG investment allocation will rise significantly in the next few years. Yet it is the scale of the increase that is most interesting here. While (as you might expect) 90% of the ESG group predict a rise, 94% of the non-ESG adviser group also believe their allocation will grow, 4% more than ESG advisers, albeit from different current base levels.

Figure 3: How do you think your investment allocation in ESG/ethical/sustainable/green funds or strategies will change three years from now?

Figure 4: How do you expect the role of ESG considerations within your business to change in the next five years?

ESG Advisers
(At least 60%)