Only a third of traditional financial advisors are involved with sustainable investing, despite the fact that many high net worth and affluent young professionals have expressed interest. Robo-advisors, like EarthFolio, have already started to fill the void in the market, reaching about $30 million in assets under management last year, but independent financial advisors may want to consider getting into the space sooner rather than later, to increase their assets under management.
In this article, we will take a closer look at important trends in environmental, social and governance (ESG) investing and what it means for traditional financial advisors. (For more, see: Keys to Keeping Millionaire Clients.)
Responsible Investing Trends
By the end of 2015, more than one in five dollars under professional management in the United States was invested based on sustainable, responsible, and impact investing (SRI) criteria, according to the Forum for Sustainable and Responsible Investment(US SIF), which amounts to more than $8.72 trillion. These investments spanned public equities and fixed income, and included alternative investments, private equity, venture capital and real estate as investors continued to search for a higher return on investment.
Many SRI investors are driven by more than financial return on investment, but research has shown that companies fitting the criteria tend to perform better. Deutsche Bank conducted a meta-analysis of more than 2,000 empirical studies and found that most research shows a positive correlation between the standards of ESG investing and corporate financial performance. Investors in ESG companies could therefore realize both social and financial benefits over conventional assets.
The opportunity to generate positive returns and help social causes in the process has sparked the interest of retail investors.
Becoming a First Mover
More than three-quarters financial advisors admit that ESG capabilities will be somewhat important now or in the future for investments, according to a 2014 study by Cerulli Associates. But less than a third of them have implemented solutions to address that interest. With significant demand from clients for ESG investments, advisors that begin offering ESG options in the near-term could realize significant advantages over other advisors, and grow their asset base. (For more, see: Socially Responsible Investing: How Millennials are Driving It.)
There are many different ESG investment providers, including TIAA-CREF, Calvert Foundation, Pax and others. While there are a limited number of liquid ESG exchange-traded funds (ETFs), mutual funds can help fill the void with nearly 20 options. Impact investment and green bonds are another option for income investors looking to help environmental and social causes, while generating a consistent income over time.
The first-mover advantage may only last so long, however. As ESG options become more widely available and liquid, many larger asset managers are likely to expand their offerings to capitalize on the market. Some advisors may have an advantage building a client base early on, but they may be less likely to develop into a market leader. For independent advisors, there is still an opportunity to gain assets and improve client satisfaction in the near-term.
The Bottom Line
ESG investments have become increasingly popular among investors, but relatively few advisors have embraced the trend. This has opened the door for independent financial advisors to expand their offerings and capture ESG-focused investors to increase their assets under management. The industry is likely to get more competitive as ESG investment options increase, but first-movers can attract and retain clients early on.
There are many different ESG investment options for financial advisors to consider, ranging from mutual funds to bonds. When looking at these options, it’s important to take expense ratios, liquidity and other risks into considerations to ensure that client portfolios are optimized for risk and returns. Acting early can help traditional advisors compete with competition from robo-advisors and ultimately capture a piece of the growing market. (For more, see: SRI Funds and Your 401(k): What You Need to Know.)