Is there a misunderstanding about how much investors care about sustainable investing?

Financial advisers underestimate the extent to which investors care about making responsible and sustainable investments, the results of a global study suggest.

While investors said that environmental, social and governance (ESG) issues were important to them when choosing an investment, the Schroders Global Investor Study 2016 found that advisers thought ESG considerations were less important when it came to recommending investments.

The study1 found that the biggest disconnect between investors and their advisers was in the UK, the US and Germany. Advisers in Hong Kong, South Korea and Australia, however, appear to be more in tune to investors’ concerns about investing sustainably.

In the UK, the average score2 for the importance of ESG issues among investors was 6.1 out of 10 compared to 5.4 for advisers. The gap was even wider in the US, with investors marking the importance at 7.3 against 5.5 for advisers.

“People are more aware of environmental threats and social challenges than ever. It’s unsurprising they expect their investments to recognise those challenges,” said Jessica Ground, Head of Stewardship.

The Schroders Global Investor Study, which gathered the views of 20,000 individuals with a minimum of €10,000 (or the equivalent) invested, also reflected the particular issues that matter most to investors.

Further questions were asked that further highlighted the disparity between financial advisers and investors (see below).

For instance, only 19% of advisers would recommend moving out of a successful investment because a company’s activities negatively contributed to climate change but a much higher proportion (28%) of investors, their clients, said they would definitely move out of it.

The effect on investment returns

A debate continues over whether there is a price to pay for ESG investing: whether the self-imposed disciplines lead to lower returns.

A recent study by MSCI, which tracks market indices, showed strategies that looked to invest in those companies improving their ESG scores had enhanced returns by up to 2.2% a year, compared to the MSCI World Index.

The authors suggested qualifying companies were less likely to face environmental fines or employment disputes and more likely to profit from early adoption of ESG-related opportunities, such as clean technologies.

“Advisers rightly feel under pressure to deliver financial returns for their clients,” said Schroders’ Jessica Ground.

“It seems that many think that has to mean a trade-off with considering ESG factors. In contrast, we believe companies’ long-term fortunes are intrinsically linked to their ESG management.”

“The reality is that many investors do care about how the companies they invest in approach environmental and social concerns and do value strong governance.”

Happy to wait for returns

Investments with the potential to have a positive environmental or social impact may take time to achieve this.

The Schroders Global Investor Study asked investors if they were willing to hold ESG-friendly investments for longer.

On this issue, investors were more closely aligned to advisers.

Investors would, on average, hold for an extra 2.1 years; advisers would recommend clients hold for 2.0 year s longer than usual.

1. The study surveyed consumers in 28 countries. The views of independent financial advisers were gathered in eight countries: UK, US, Germany, Italy, Hong Kong, Singapore, South Korea and Australia.

2. Respondents were asked to rate the importance of five different ESG issues, when choosing an investment (investors) or recommending investment products (advisers), using the scale 0=Not at all important to 10=Critical. The importance ratings quoted above for each country, are an overall average across all five issues.