Various symbols of ESG investment strategy / gesrey

This article appears in the Mid-October 2022 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.

As ESG products become more popular among clients, and institutions respond by introducing new products, financial advisors remain slow to adopt the investment approach.

For the past two years, the Report Card surveys conducted by Investment Executive have included a question asking what percentage of advisors’ managed assets follow an ESG mandate. Among the 40.2% of advisors that reported some exposure to ESG products, the average portfolio exposure to ESG was 26.7%. That’s up from 22.3% exposure a year ago, when 46.3% of advisors reported having ESG assets. (Insurance-only advisors were not asked this question.)

A recent boom in ESG product launches means historical performance data is lacking for many products, a challenge that some advisors pointed out.

“I’m starting [with ESG exposure] and there aren’t many offers with a lot of history. It’s still new,” said a brokerage advisor in Quebec.

“[My ESG exposure is] relatively new,” said another brokerage advisor in Ontario. “I’ve been in the business for a long time [and] it seems like there’s a faddishness to it right now.”

However, Morningstar Direct tracks 49 sustainable funds with more than five years of performance history, and 34 with more than 10 years.

Advisors who reported a more proactive approach to ESG investing said that higher demand from clients was a driver.

For example, a dealer advisor in Quebec said, “The new generation is asking for ESG funds.” And a retail bank advisor in Ontario said, “The industry is moving rapidly; it’s a step in the right direction.”

For 2022, the segment that reported the highest average allocation to ESG mandates was, once again, retail bank advisors. This channel said 44.5% of their assets followed ESG principles, up notably from 31.1% a year ago.

“We have seen the funds that follow ESG tended to do better in the last three years. In the future, they will do better than other funds,” said a retail bank advisor in Ontario. Another bank advisor in British Columbia said the funds tend to have a better risk return profile than other products.

“[ESG is] going to be front and centre,” said a retail bank advisor in the Prairies. “It’s very apparent where the government is taking us.”

Other bank advisors remained skeptical. “It’s great, but I still feel like it’s a fad. There are guidelines and procedures, but it’s still fluid and too early […] from a return perspective,” a retail bank advisor in Ontario said.

Among the four segments, brokerage advisors reported the next highest allocation to ESG products at 22.9%, similar to the 23.8% reported by that channel a year earlier.

“Clients are asking about it, but the options aren’t as good as I’d like them to be,” said a brokerage advisor in Atlantic Canada. “I wait for [clients] to bring it up because I see my job as mak[ing] them money, not worry[ing] about that.”

According to a recent Morningstar report, most sustainable funds under-performed their category peers in the second quarter of 2022, but “to date, sustainable funds and ETFs have done little to prove or disprove their performance edge.”

A brokerage advisor in Quebec noted an investor’s age can play into the ESG decision: “A lot of my clients are older and they don’t care quite as much. But as I onboard the kids, it’s becoming more important.”

ESG proponents in the brokerage space were more optimistic, with one advisor in B.C. saying, “That’s been one of my big themes. I’ve been really paying attention to it in terms of the stock picks for my clients. A lot of [clients] are also asking.”

Dealer advisors reported a lower average ESG product exposure at 20.2%, although that was higher than the 17.3% reported by the segment in 2021. Despite that increase, sentiment in the group was similarly mixed.

Some dealer advisors were positive about what ESG products can do for clients who demand them.

A dealer advisor in Ontario said incorporating what are perceived to be more responsible products was easier nowadays because “we’re being provided with more and more options. Every mutual fund company is coming out with more clean and social governance-type fund[s].”

But several dealer advisors noted they were resistant to the ESG trend because product mandates and terminology are “confusing,” and they believed that ESG products charged higher management fees. That impression is not borne out by data from Morningstar, which shows that as of Dec. 31, 2021, average management expense ratios for sustainable funds were lower in the equity and fixed-income categories than for non-sustainable funds.

Other advisors in the dealer channel were intrigued by ESG products but wondered about “greenwashing,” which regulators have attempted to address through proposed disclosure standards. Said a dealer advisor in Ontario: “In theory, [the ESG trend] is very good, but [there’s] a lot of fluff and a lot of marketing on all levels.”