While Affluent Investors Are Discussing ESG, Financial Advisors Are Pulling Back

Skepticism around environmental, social and governance (ESG) investing is growing in the financial advisor community.

According to a new Cogent Syndicated report from Escalent, only 58% of advisors are using ESG investments today—a drop from 68% in 2020. At that time, advisors anticipated they would allocate 9.5% of their assets to ESG by the end of 2022. In contrast, average allocations have flatlined, rising merely 0.2 percentage points to 4.8% in the past two years.

All Talk, No Action

ESG investing may have fallen short of projected gains, but it’s not for lack of conversation. Predicting ESG’s Future™ surveys affluent investors and financial advisors to understand changes in awareness and attitudes to ESG investing.

• Nine in 10 advisors say they are talking about ESG investing with their clients—up from 81% in 2020. However, those conversations do not appear to be driving growth.
• 14% of advisors report declining interest in ESG among their clients over the past six months, with only 24% saying client interest is increasing, a drop from 42% two years ago.

Despite the expanded availability of ESG products in the retail investor marketplace, advisors are pulling back. Their reasoning is nuanced—66% cite weak client demand as a primary reason ESG criteria are not influential in their decision-making, with inconsistent definitions coming in second at 42%. In particular, younger advisors cite rising frustrations in this area. Their rate of concern around the issue has more than doubled over the past two years.

Meanwhile, advisors age 55 and older worry about unclear government guidance, with 47% citing it as a barrier—a sentiment that just 13% of their younger counterparts echo.

A Polarizing Issue

Until the industry can agree on shared standards for evaluating the impact of ESG investing, these concerns will likely endure. Without clear, shared investment standards, qualifications and reporting, ESG investing is vulnerable to criticism that it is merely “greenwashing.”

While government regulations could add to the movement’s credibility, the shifting political landscape is making that unlikely—at least in the short term. As partisan tensions rise, some firms are suffering public backlash as state legislators seek to undermine so-called “woke” investment strategies.

Advisors can be expected to shy even further from incorporating ESG into their investment strategy as it becomes increasingly divisive. 13% of advisors cite perceived negative public sentiment as a barrier to ESG investing—an increase of 10 percentage points since 2020.

Financial advisors are ultimately accountable to their clients, and courting controversy introduces risk. As the issue becomes more charged, a “wait-and-see” policy is likely to be the preferred approach for many.

The Next Generation of Affluent Investors

While advisors are practicing caution, affluent investors do demonstrate interest. At present, 3% of affluent investors use ESG investments, but four in ten say they are likely to adopt them in the future. Current ESG users and intenders are concentrated within younger generations, which presents a possible contradiction between the perspectives of advisors and affluent investors.

Just 11% of advisors say they see ESG investing as a growing trend or important factor in helping them attract new clients. Yet among millennials, the appetite for ESG investing appears relatively healthy. Of the affluent investors who say they are likely to adopt ESG investing, 38% are millennials: the only generational segment reporting an increase in this category.

For financial advisors, most of their clients are Gen X and older. As millennials become more prominent in wealth and influence, they may find that traditional advice providers cannot offer the support and access to the socially conscious investment vehicles they seek. This could slow ESG’s adoption but also increase pressure for its continued evolution as a need for tightened regulation and reporting continues.

Proving the Value of ESG

If ESG is to have a future in the advisor community, asset managers must double down on efforts to prove its value. 42% of affluent investors say they don’t know enough about ESG investing to make a change. To combat this—and meet the needs of the next generation of affluent investors—asset managers need to make a strong case for ESG, demonstrating both its investment value and its causal objectives.

If advisors are not advocating for ESG, clients are unlikely to learn more about it—a cycle that will only exacerbate downward trends.

With all the political attention around ESG and barriers to adoption, the direction of this investment trend is yet to be determined. Predicting ESG’s Future™ uncovers shifting industry dynamics and influences impacting ESG investments, offering asset managers key insights as they seek to optimize their strategies for the future.