Closing the ESG awareness gap

Net inflows to sustainable funds doubled in 2020, according to data from Morningstar.

Asset managers have been racing to repurpose existing funds or launch new sustainable offerings, and large advice groups are revising their processes to embed ESG considerations.

But as rapid growth has emerged, the market is struggling to keep pace with consumer expectations.

We look at 4 shortfalls where the industry is playing catchup with changing customer demand

1. Brand awareness

No company has yet fully established itself as the place to go for sustainable investing expertise. The overwhelming majority (81%) of consumers polled in our nationally representative study said that they thought it was important for firms to offer sustainable options. This isn’t to say that they all want to use them. But it is expected as an option and will negatively impact brands in the future where it is absent.

Despite clear demand for ESG funds, no firm has really made a successful move to develop their reputation in this market. Fund investors struggle to identify brands that stand out for sustainable.

When Boring Money asked fund investors which managers they would consider for a sustainable fund, no clear winner emerged. The responses indicate that consumers just identified the firms they were most familiar with overall, and that no brand triggered a strong association with ESG. There is a clear gap for providers that want to develop a brand reputation in this market.

2. Consumer awareness

Among fund investors, 58% say they are aware of the term ‘sustainable’ in an investing context, but only 35% would feel confident explaining it.

Industry jargon words like governance, stewardship, ESG and blacklisting yield even fewer positive responses when investors are asked if they felt they could explain the term.

Significantly more work needs to be done to ensure consumers can actually make sense of the communications and collateral being sent their way. Firms that can cut the jargon and explain sustainable investing in manageable terms should succeed, but there is much to improve on.

3. Adviser training

Advisers want more training and support to help them manage conversations around ESG investing.

There are signs the industry is improving, with 50% of advisers in 2020 saying they feel ‘very confident’ broaching the subject with clients, up from a third in 2019.

As preparations for Mifid II take hold, we expect to see more adviser firms prepare for this, but there is still work to be done.

There also seems to be a gap between advisers and clients in terms of the perceived importance of ESG. Of the advised clients we surveyed, 83% told us they feel a discussion about ESG would be valuable, but only 54% of advisers feel the same.

4. Employer engagement

Workplace pensions could become critical to the ESG debate in coming years. Our data shows that employees want to do more with their pension savings when it comes to sustainable investing.

But they expect their employer to do the heavy lifting. Over two thirds (67%) said they felt their employer should take the lead in ensuring their workplace pension is invested sustainably.

This is a tricky one to crack as employers are limited to some extent by auto-enrolment rules and the default funds available through the big pension companies. Trustees are also hesitant to embrace evolving investment strategies which may potentially have an impact on returns – the expanding notion of fiduciary responsibility to include sustainable issues is a confusing path to tread.

There is a gap between what employees expect and what they’re getting at the moment.

This issue has become problematic in the past for DB pension funds, with the public and staff rebelling against corporate sponsors that have exposure to controversial assets through a DB pension.

A similar reputational risk exists here in workplace DC land. Providers and employers should look at catching up with employee expectations to avoid reputational headaches. If you don’t ask your employees what they want and care about, how can you deliver a suitable range of options?

FIND OUT MORE: Boring Money’s Sustainable Savers Census

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