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ESG: Are retail investors being left behind?

by Josh Blundell, Head of Research and Operations

There can be no arguing about the explosion of ESG or responsible investing in the past few years. The emergence of a dedicated publication such as ESG Clarity is testament to that. But the facts are also clear to see too, whether you look at the growth of assets under management or the ever-widening product set.

Indeed, last year was hailed as the year ESG came of age as assets in sustainable related funds reached $1.7tn, according to Morningstar – up 50% on the previous year with Covid-19, perhaps not unfairly, being associated with this growth.

Yet, despite the surge, in-depth research by The Wisdom Council, in partnership with Federated Hermes, Rathbone and St James’s Place, has raised questions whether retail investors are being left behind. Institutional money may be flowing into ESG but are we seeing the same structural change in how portfolios are managed when it comes to retail assets?

Our research questions whether we are. Yes, retail investors are being offered product options to choose from – if they’re so inclined to engage with their long-term savings in a meaningful way and then empowered to select an RI product over an alternative. But the reality suggests that most investors aren’t so inclined. Survey after survey on default pensions are testimony to this.

Investors don’t associate the investment industry with sustainability

Our wide-reaching research programme analysed thousands of conversations on social media, carried out interviews with investors and financial advisers, and surveyed more than 2,000 UK consumers, all of whom either had a workplace or private pension. And we found that around six in 10 retail investors don’t realise they can invest in a way that contributes to challenges such as climate change.

In fact, 52% of UK consumers contributing to a pension don’t even recognise that the financial services industry can make a difference at all – other than aviation, fossil fuels and mining, investment services is the sector seen as least likely to be able to operate sustainably.

This is a worrying failure of connection – it appears that people in the UK simply don’t associate the investment industry with sustainability. While they may think of recycling or upcycling or using less plastic or moving to a green energy supplier when trying to live more sustainably, they rarely think about where their savings sit or where their investments have gone.

Yet savers and investors care about these issues

That isn’t to say investors don’t care – they demonstrably do care. Four in five of those we surveyed believe they have an important role to play in protecting the environment, while three-quarters said we all need to limit our consumption to ensure a sustainable future. And these views are influencing behaviour, both with people taking direct action to limit their own impact by using less plastic, for instance, but also choosing more sustainable companies as part of their purchase decisions such as a green energy provider.

So, where does that leave the trillions of pounds worth of assets managed on behalf of people who aren’t wildly engaged with their savings or investments – the retail advised assets, the default pension funds, the personal pension schemes, the simple stocks and shares ISA solutions from the big banks (arguably still the first port of call for most people when it comes to investments)?

The investment industry is collectively saying that ESG is fundamentally a better way to manage money – which begs the question as to whether all retail assets should be employing ESG integration as a bare minimum.

There are green shoots in our research. It shows that investors who are already investing using responsible funds are much more likely to be advised. This is a positive turnaround given that financial advisers were once seen as barrier to the ESG market.

Consumers now expect all companies to be acting responsibly

The vast majority (81%) of UK consumers now expect every company to be as environmentally responsible as they can be – it can’t just be a product choice, it is increasingly a hygiene expectation, for every sector. And our research shows this clearly applies to pensions and investments as well.

For example, when we explained ESG integration in an accessible way (through a short animation presentation) two-thirds of them said they would want some or all of their pension to invest using this approach. Yet clearly most aren’t going to seek it out for themselves. This evidence shows that the latent, often passive demand for the investment industry to be investing responsibly is significant and widespread – in fact our research suggests it is simply an expectation. Particularly, if we are saying it doesn’t require a sacrifice in terms of either performance, risk or cost.

The investment industry needs to take ownership and lead. It needs to act on behalf of retail investors and ensure they don’t get left behind. And maybe by evidencing that it is part of the solution (not the problem) and does have a vital role to play, then it will start to bridge the gap between a consumer population that is trying to be more sustainable and an industry that is not perceived as part of the solution.

A transparent industry that takes its leadership role seriously would be a good result for everyone.