Environmental, social and governance, or ESG – which until not so long ago was considered mostly the concern of millennials and environmentalists – has moved decisively into the mainstream.
In May, data from Calastone showed that UK investors had invested £3.9bn ($4.9bn) into ESG funds since July 2017, significantly more than the £107m committed during the 33 months before that date. Asset managers have played their part by shifting from traditional asset classes towards multi-asset, alternatives and ESG in fund launches.
The UK wealth management industry has been braced for an associated surge in client demand – and is starting to see this happen. During a virtual roundtable hosted by Aon for the UK wealth industry in June, a range of participants confirmed that client interest in ESG is manifesting in multiple ways, driven by environmental concerns but accelerated by the Covid-19 pandemic. Not all of this relates to investing. Wealth firms are being questioned on their record in reducing carbon emissions, their commitment to community causes and how they are using their voice at AGMs to achieve positive impact.
Our own data leads us to agree there is a significant opportunity now for firms to capitalise on clients’ appetite not just for integrating ESG principles into their investment process but actually investing to achieve sustainable goals. Contrary to some of the myths, a growing number of clients across all generations are paying attention. However, they will need more effective education and guidance from firms to improve their understanding.
Values not goals
Survey data collected in 2019 from high-net worth clients in the UK shows their primary motivation for investing sustainably is to be true to their values. This powerful emotional dimension is important to clients of all ages but particularly those under 40. This younger generation is more circumspect about re-enforcing charitable giving through their investment choices to advance specific causes they care about.
We see the same trend across the Atlantic. Our recent research partnership in association with the Money Management Institute in the US revealed that advisers consistently underestimate the importance of values to their clients and have failed to reflect values – as opposed to goals – in financial planning and investment management discussions.
They are missing an opportunity: alignment on values is a critical success factor for the overall relationship.
Beyond climate change
If the cross-generation trends are surprising to firms, it may be because change is happening so quickly. Many investors have only recently become galvanised. In the UK, 66 per cent of HNW clients say they are now more willing to consider sustainable investments than they were 18 months ago.
Over that time, the climate crisis has never been far from news headlines, however, it would be a mistake to attribute changing attitudes entirely to environmental concerns.
Even before the pandemic, clients were increasingly troubled by the human impact of economic issues, including a lack of rewarding job opportunities and widening social inequality (see chart). This is not a trend likely to go away quickly, as the effects of a deep global recession become visible in the communities in which they live.
Capitalising on this appetite will however require a different communications focus. The underwhelming consensus in clients’ minds is that sustainable investments are both risky and offer doubtful potential for significant returns. Nevertheless, they remain interested in principle, offering an education opportunity to firms that have a high conviction in this area.
The power of the human touch
Our data shows that clients are more alert than before to opportunities for using their wealth to generate impact. But they will need active guidance in understanding how they can achieve their sustainability objectives. There will be some priorities for which there are well-developed solutions and others where there is no business model to achieve impact and returns at the same time, requiring a philanthropic approach instead.
This information gap offers a golden opportunity for marketing leaders who are adept at the kind of storytelling required now, rather than communicating through a technical investment lens that focuses heavily on performance and track record.
ESG has indeed moved into the mainstream. Yet clients are looking for a human approach to support them as they go through the journey from interested party to active investor.
Caroline Burkart is associate partner and Tasha Vashisht head of Thought Leadership Development, Client Insight at Aon
