COP26, or the 26th UN Climate Change Conference as it’s formally known, is everywhere just now.

Climate pledges have been coming thick and fast at both a country and company level.

The role of the financial services sector in all this took centre stage yesterday at COP26, with chancellor Rishi Sunak pledging to make the UK the first net-zero financial centre.

The FCA has also set out its ESG priorities as part of its strategy for positive change. (We’ll come back to the regulatory perspective a bit later.)

In our world, there has been a growing focus on ESG investing, both from investment marketeers touting their wares to clients wanting to do good with their money but not sure where to start.

It has also creeped into the due diligence questions advisers are asking about their current and potential platforms – this is in the form not just of ESG investment propositions, but also the platform’s own carbon footprint and its approach to wider issues like diversity and inclusion.

It’s why we are factoring this into our next round of development here on Platform Analyser.

So with all these big words and big promises flying round, we thought it was worth getting the lay of the land on all things ESG investing. What does the data tell us, and what’s the mood on the ground from both consumers and advisers?

The numbers

From a fund management perspective, ESG investing appears to be a small market, but one that is growing markedly.

Data from the Investment Association published in September shows that £11.7bn in net retail sales went into responsible investment funds (to switch up the terminology) during 2020.

Over the same period, funds under management in responsible investment funds went from £35bn to £55bn. These numbers span funds with specific exclusions, funds with a sustainability focus and impact investing funds.

A lot of this has been powered by investment performance, but the pandemic effect of being more conscious about the world around us is also there to see.

Responsible investing is also leading the charge on new fund launches, with the number of funds in this space going from 193 to 226.

For the nuance of how ESG investing is working from an adviser perspective, it’s worth examining our own research.

Based on the 316 adviser responses as part of our Crossing the ESG event horizon research, these stats are a good snapshot of the on the ground view:

·       80% agree that confusing and conflating terminology is hampering progress

·       44% feel they don’t have the tools or materials to make an informed choice for clients

·       43% think recommending bespoke client by client solutions is an unmanageable situation

·       60% see the answer in asset managers transitioning to ESG factor assessment as standard.

The FCA view

Yesterday was a big day for the regulator in terms of demonstrating what it’s doing to get better quality ESG information out there.

FCA chief executive Nikhil Rathi gave a speech at COP26 outlining what the regulator has done so far, such as writing to fund groups saying they need to evidence how ‘ESG’ their funds really are.

The FCA has also hired its first ESG director, Sacha Sadan, who sets out some of his concerns about how the ESG market is evolving in this recent FCA podcast.

Amid the announcements, the regulator published a discussion paper on how to label sustainable investment products, and what disclosure rules should be in place for asset managers.

As pointed out by my fellow lang cat Mike Barrett, the alarm has been sounded for advisers too.

In that paper, the FCA says it is looking at “how to introduce rules for advisers” and that “we consider it would be appropriate to confirm that advisers should consider sustainability matters in their investment advice and ensure their advice is suitable and reflects consumer sustainability-related needs and preferences.”

So, it seems the regulator has the bit between its teeth on this. There’ll be more discussion and consultation to come, but rest assured there is more to come.

What consumers say

In its Financial Lives survey, published earlier this year, the FCA found that 80% of respondents wanted their money to ‘do some good’, while also providing a financial return.

Some 71% wanted to ‘invest in a way that is protecting the environment’ and 71% would not put their money into ‘investments which are unethical’.

This tallies with our own ESG data, in terms of trends at least. Our consumer research carried out by YouGov with 4,121 adults found that in terms of what’s important to them on ESG investing, 92% said the environment, 82% said the social/societal aspect of ESG, and 88% said governance.

Some 83% said values come into buying decisions, and 63% believed their money could make a difference.

What about advisers?

As with consumers, advisers and planners are not one uniform group, and as such the mix of views on ESG varies.

Here’s what you told us at the back of end last year – it will be interesting to see if these views have moved on at all since then.

Where do you think ESG will be in a few years’ time?

“Mainstream. Hopefully not talking about it other than  the companies who do it badly getting pilloried in the Mail.”

“I hope that ESG investing will just be known as investing in the future.”

“Much more mainstream although with a dogged group refusing to accept that it’s not a fad.”

“Same place - well-intentioned, confused and angst-ridden!”

What one thing would make your day-to-day ESG life easier?

“An industry wide standard client guide to explain ESG investing.”

“For certain descriptive terms to have actual legal meaning so fund managers/providers can’t use them unless they actually meet a set criteria.”

“Fewer labels with commonly agreed meanings.”

“Better independent tools for screening funds, models and ESG propositions.”

“Better research tools or a guide on where to start with ESG research.”

“That it is treated with the contempt it deserves and dies on the vine.”

Is there anything the sector could do to convince you to place more business in ESG?

“Nope, we believe it is the only way forward.”

“I think it will happen naturally.”

“Less marketing bullsh*t, more actual evidence of impact.”

“Sure - some hard, objective, fact-based evidence that ESG focused investments deliver better returns. Sorry to say this, Greta, but for me, it’s all about the money - because that’s what my clients are hiring me for (at the moment).”

“Make it easier to target the investment solutions to the end investors actual preferences.”

“Make everything easier to understand.”

To read our ESG report in all its glory, download Crossing the ESG event horizon here.

If you have views on ESG investing or anything else, we’d love to hear them. You still have time (just) to take part in our State of the Adviser Nation research, which closes on 5 November 2021.