ESG investing has spread across institutional asset management, expanding beyond equities to include green corporate and municipal bonds and even private markets. At a minimum, asset managers are expected to measure the E, S and G risk characteristics of their strategies and around the world the bar is being raised in terms of regulatory disclosure requirements and expectations regarding commitments to various standards. But is ESG in asset management largely confined to institutional investors? To what extent, if any, is ESG being applied in the wealth management arena, and what are the obstacles to greater adoption?
An article published by Citywire Wealth Manager titled, “ESG moves into the mainstream: What next for Wealth Managers?” explores this question. It quotes a senior compliance officer at Charles Stanley (a large UK-based investment management company founded in 1792 – and no, that’s not a typo) who observed, “It is not a surprise that asset managers are taking the lead in terms of making… [net zero and other sustainability] commitments because I think it is simpler for fund managers to do this with a smaller number of funds than it is for a portfolio manager with 10,000 clients.”
The article goes on to acknowledge that wealth management businesses are still behind asset managers in terms of ESG, not just related to climate change commitments but also with respect to the “S” pillar. Simone Gallo, managing director at sustainable advisory business Mainstreet Partners, noted that one of the biggest hurdles facing wealth managers is a lack of resources. He noted that while asset managers typically source data from multiple providers and employ teams of 15 to 20 people to focus on ESG, most wealth managers cannot afford teams of that size and do not have access to that kind of data.
“The majority of wealth managers don’t have these tools, as they often get information directly from the asset managers – but now they need that information at a portfolio level,” he said. Gallo believes that in the not-so-distant future, wealth management clients will want to see how their portfolio stacks up in terms of ESG, in addition to financial performance. “At some point it’s going to be pretty obvious who is doing a good job and who isn’t,” he predicted, and said that investors will be able to evaluate various wealth managers and identify who is “doing the right thing.”
Over on this side of the Atlantic, RBC Wealth Management found that while their U.S. clients believe ESG investing is here to stay and well over half (57%) are interested in allocating a larger portion of their portfolios to ESG products, a larger percentage of their clients say they are more concerned about their return on investment than on the ESG impact of those investment choices, compared to the results of a similar survey conducted last year.
RBC reports that much of the ambivalence about ESG may be due to a mistrust of how it’s marketed: 74% of the clients surveyed believe that the information on ESG provided by many firms is misleading. At OWL ESG, we believe this may also be partly due to a persistent misconception about sustainable investing in general, namely that it prioritizes improvements in a company’s E, S, and/or G practices over profitability and shareholder value. While a growing number of asset managers are talking about ESG alpha, the wealth management industry may lack the educational resources and tools to convince their clients that it is not a question of pursuing either sustainable investing or long-term financial returns—the message should be that the two go hand-in-hand.