A substantial majority of financial advisers and discretionary fund managers (DFMs) have bought into the broad concept of ESG investing, but confusion remains over terminology, research and processes, according to a survey from the Association of Investment Companies (AIC).¹

Nearly nine-tenths of financial advisers (89%) expect demand for ESG investments to increase over the next 12 months. Only 2% thought it would decrease slightly and not a single respondent said it would decrease significantly.²

The vast majority of financial advisers are interested in ESG investing and have already begun researching it, with 23% of financial advisers considering themselves early adopters and a further 48% stating that they had recently become more knowledgeable about it. Among DFMs, these figures were higher, 34% and 51% respectively. Only 3% of financial advisers and 5% of DFMs said that ESG investing was not of great interest to them.

Personal experience of ESG investing among financial advisers and DFMs

Source: AIC/Research in Finance. Percentages are % of respondents who agreed with each statement. Respondents could select only one statement.

The majority of financial advisers have bought into the concept of ESG investing, with nearly four in five (79%) agreeing that investments should make a positive difference as well as a financial return. Most advisers also agreed with the statements that ESG investing will have a positive impact on the environment (69% agreed) and a positive impact on society (60% agreed). These figures were similar among DFMs.³

Most firms are now offering an ESG investment proposition: 74% of financial advisers and 86% of DFMs said their firms already offered one, while a further 23% and 14% respectively said their firms were looking to do so in future.

ESG and performance: “Not a conversation around compromise anymore”

The AIC research shows the view that ESG investing could mean worse performance has been largely quashed by good returns from ESG funds in recent years, though a minority still think it might hit investors in the pocket at some point.

Among financial advisers, 40% said that ESG investing is likely to lead to better performance, with only 14% feeling it would lead to worse performance. Those numbers were 56% and 18% among DFMs.⁴

One adviser commented: “ESG portfolios stood up probably better than non-ESG portfolios through last year. So it's not really a conversation around compromise anymore. It's very much about thinking positively about investing like that. So, do you want to save the planet or not? Do you want businesses to be run more socially and ethically in a responsible way? It's all-encompassing, that sort of stuff. It's just how we should be investing our money.”

But ESG could mean higher charges

However, views on charges were more negative, with 42% of advisers and 49% of DFMs expecting ESG investing to mean higher charges, and only 1% and 5% respectively thinking it would mean lower charges.⁵

Related to this, advisers are still not wholly convinced by the idea of passive funds for ESG. A majority (62%) agreed that ESG investing is better suited to active funds, and less than half (42%) agreed that ESG investing could be achieved through passive funds. DFMs strongly prefer active options, with 80% agreeing that ESG investing is better suited to active funds.

When it comes to risk, the largest share of respondents (55% of financial advisers and 40% of DFMs) believed that ESG investing would have no overall impact on risk. However, about a third of both financial advisers (33%) and DFMs (31%) worry that ESG investing will mean higher risk.

Some financial advisers cited the extra volatility they associate with ESG funds because of their narrowed universe. An additional concern is that ESG investing doesn’t always fit well with the risk-managed approach to building portfolios that the typical advisory firm adopts.

One financial adviser said: “If you strip out large sector areas you can essentially increase the risk, the volatility. One of the big drivers, quite rightly, from the regulator is assessing people's risk and making sure that the investments that you have fit within that and then other things come secondary to that. How do I protect myself and my company and my other clients that I look after if this thing loses 30% or 40% in a heartbeat? The client says, well, yes, I know I said I wanted that positive impact thing and all of that, but I didn't want to lose 20% or 30% in a week, and now I have.”

Knowledge gaps and confusion: “An absolute rabbit hole”

Although most financial advisers show positive sentiment towards ESG investing in general, they do not rate their knowledge of ESG highly. On a scale of 1 to 5, financial advisers rated their knowledge level as 3.0. Knowledge of impact investing was slightly lower at 2.7.⁷

Among those advisers with a lower level of knowledge, there was uncertainty about ESG terminology and the different types of ESG fund. The fact that some ESG funds invest in the likes of oil companies was a further source of confusion. These advisers can feel overwhelmed by the topic and crave simplicity and standardisation, the research found.

One adviser said: “I've sat through various ESG webinars, and in all honesty, some of it is the jargon, the names for different things, I almost haven't heard it enough times for the main words to resonate.”

Advisers and DFMs who are more knowledgeable about ESG still admit to knowledge gaps and areas of confusion. These include uncertainty over what ESG funds are available to them and how to measure funds’ ESG credentials. When it comes to client conversations about ESG, some are more comfortable with the topic than others.

A DFM commented: “The portfolio managing is pretty much the easy bit as far as we're concerned. It’s actually gauging what clients' expectations and preferences are in that space, which is probably the harder conversation because the whole topic is so diverse and you can go down an absolute rabbit hole.”

The difficulty of researching ESG investments is a problem among both advisers and DFMs. A majority of advisers (58%) and DFMs (55%) agreed with the statement “I am supportive of ESG, but I find it hard to research investments’ ESG policies and credentials.” Even among those who described themselves as early adopters of ESG, 47% agreed with this statement.⁸

A financial adviser who was an early adopter of ESG investing said: “More of an understanding of certain ESG standards that the fund managers look for in companies before they invest would be helpful. What questions do they ask the directors and managers of companies in order for them to say, right, this is a company that meets the standards we are happy with?”

AIC comment on the research

Nick Britton, Head of Intermediary Communications at the Association of Investment Companies (AIC), said: “Our research shows that scepticism around the whole concept of ESG investing is now fairly rare among advisers. However, the fog of jargon and competing metrics and standards is confusing even for those who regard themselves as knowledgeable on the subject.

“The issue of performance is also crucial. The fact that various ESG investment approaches have performed well in recent years has shaped advisers’ attitudes, but of course, this isn’t guaranteed to continue in future.

“In the investment company world, we’ve seen companies with strong ESG credentials in high demand. Our renewable energy infrastructure sector, for example, has raised over £2.5 billion so far this year, helping to drive record fundraising for investment companies overall. Investment companies’ ability to invest in a wider range of assets, including unquoted impact investments, makes them attractive to investors who want their investments to do good and see that impact being measured and reported.”

Further details of the research, including more survey questions, are available on request. Please contact the communications team (details below).

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Notes to editors

1. An online survey of 210 financial advisers and discretionary fund managers (DFMs) was commissioned by the Association of Investment Companies (AIC) and conducted by Research in Finance. The respondents comprised 125 financial advisers and 85 DFMs. The online survey was followed by 10 in-depth video interviews with selected participants to gain further insights. Fieldwork was conducted between 27 July and 31 August 2021.
2. The full breakdown of responses for this question is as follows. 33% of financial advisers said demand would increase significantly, 56% said it would increase a little, 10% expected no change in demand, 2% said it would decrease a little, and no respondent said it would decrease significantly.
3. Among DFMs, 78% said that investments should make a positive difference as well as provide a financial return, 74% agreed that ESG investing will have a positive impact on the environment, and 67% agreed that ESG investing will have a positive impact on society.
4. Among financial advisers, 40% said ESG investing was likely to improve performance, 32% said it was likely to have no overall impact on performance, 14% said it was likely to hinder performance and 14% gave a ‘don’t know’ response. Among DFMs, 56% said ESG investing was likely to improve performance, 21% said it was likely to have no overall impact on performance, 18% said it was likely to hinder performance and 5% gave a ‘don’t know’ response.
5. On charges, 1% of financial advisers said ESG investing was likely to lead to lower charges, 49% said it was likely to have no overall impact on charges, 42% said it was likely to lead to higher charges, and 8% didn’t know. For DFMs, these figures were 5%, 40%, 49% and 6% respectively.
6. On risk, 4% of financial advisers said ESG investing was likely to be lower risk, 55% thought it would have no overall impact on risk, 33% said it was likely to be higher risk, and 8% didn’t know. For DFMs, these figures were 26%, 40%, 31% and 4% respectively.
7. Advisers rated their knowledge of ESG investing and ESG considerations on a scale of 1 to 5 on which 1 represented “needs improvement” and 5 represented “excellent knowledge”. DFMs rated their knowledge only slightly higher than financial advisers, with an average score of 3.2 for ESG knowledge and 2.9 for knowledge of impact investing.
8. Among ‘early adopters’, 47% agreed with the statement “I am supportive of ESG, but I find it hard to research investments’ ESG policies and credentials.” Among those who described themselves as having recently become more knowledgeable about ESG, 59% agreed with the statement. And among those with low experience in ESG, 65% agreed with the statement. These figures include both financial advisers and DFMs.
9. The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the 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 mission statement is to help members add value for shareholders over the longer term. The AIC has 358 members and the industry has total assets of approximately £274 billion.
10. Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance. The value of investment company shares, and the income from them, can fall as well as rise. You may not get back the full amount invested and, in some cases, nothing at all.
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