ESG Investing, Here to Stay

In 2022, for the first time in over a decade, there has been a net outflow in sales of retail investment funds in the UK [1]. In this context, investments managers, platforms and advisers need to work harder to retain investors and attract the limited pool of capital available in the market. In July 2022, our team surveyed 996 UK retail investors on their attitudes towards ESG investing [2] and our research showed that consumers are no longer thinking strictly in terms of risk and return but in terms of risk, return and impact [3]. In a world of high competition among investment providers, ESG investing offers a significant opportunity for organic growth in the UK retail investment market that blends Profit, Planet and Purpose.

Part 1: Collective Action for ESG Investing

Over the past decade, ESG investing has gained popularity as a way ‘to do good’ while providing a financial investment. This is evidenced by the fact that, as Make My Money Matter reported, as of November 2022, c. £1.3 trillion of UK pension money (out of c. £3 trillion) was managed in a way that is committed to a net zero future [4]. This shift has been driven by increasing activity from consumers, regulators, and companies in the industry.

• Consumer Demand – ESG investing has moved from a specialist proposition into a mainstream investment activity for retail investors. This portion of the market also happened to be resilient despite the 2022 retail fund outflows. Our UK retail investors survey has shown that 84% of ESG investors have either maintained or increased their proportion of ESG assets since the start of pandemic [5]. This resilience makes ESG investing an attractive segment for investment providers to be active in.

Figure 1: Has your proportion of ESG to non-ESG assets recently changed?

• Regulatory Pressure – UK regulators and policymakers, have been proactive in pushing forward ESG investment regulations (e.g., mandatory TCFD disclosure requirements [6]) to increase transparency in the industry. While disclosures can be time-consuming and challenging for investment providers, they will provide consumer with a consistent way to compare the positive impact of ESG funds available to them. This offers an opportunity to transform what is usually a strictly back-office regulatory activity into a reliable way to build trust with consumers.
  
  
• Industry Commitments – Through industry-led alliances (e.g., UN PRI, Net Zero Asset Managers initiative) large sums of capital from global investment providers have been committed to support decarbonisation. While these initiatives provide a framework for action, it is important to remember that most investment providers in the market are managing funds on behalf of other institutions or individuals who ultimately have discretion over the way their money is invested. Therefore, a successful portfolio decarbonisation will require investment providers to gain customer buy-in to meet their targets.

Part 2: Complexity in Retail ESG Investing

While the behaviour of key actors in retail investment points towards the fact that ESG investing is maturing and here to stay, to be successful, investment providers will have to navigate a complex market and resolve dissonant thoughts that exist among consumers. From our research, we identified a few things that make ESG investing a particularly complex topic, including:

• Well-Defined Causes – Retail investors value transparency and like to know where their funds are allocated and how their investments make a positive impact. This is reflected in the fact that 77% of the ESG investors we surveyed said they would only invest in an ESG fund with a ‘clearly defined’ set of causes it supports. Therefore, all-encompassing funds marketed as ‘ESG’ or ‘socially-responsible’ without a clear purpose to consumers are not convincing enough for most retail investors.

Figure 2: Would you only invest in an ESG fund with a clearly defined set of causes it supports?

• Low Awareness of Technical Terminology – 53% of retail investors are completely unaware of any of the three following ESG investment frameworks: exclusionary/negative screening, inclusionary/positive screening, and impact investing. This means that investment providers are facing consumers that are motivated to engage in ESG investing but lack an understanding of the technical terminology commonly used by industry insiders. This context makes communication particularly tricky as providers need to bridge the technical terms, they may use internally, with those that are appropriate for retail investors.

Figure 3: Which of the following ESG investing frameworks are you aware of?

• Unforgiving towards Greenwashing but Limited Research by Consumers – On one hand, 69% of retail investors have or would refrain from investing in a financial asset if they did not trust the ESG investment framework used by their provider. This means that customers can easily be deterred from investing by a perception ‘greenwashing’ [7]. On the other hand, only 38% of retail investors have read a form of ESG report on one of their portfolio investments. This shows that most investors are not willing to invest the time necessary to do thorough research into the ESG credentials of their investments. For investment providers looking to attract new customers, this implies that they have a small window to build trust with clients. Getting the first impression wrong and being suspected of greenwashing can have dramatic consequences on investment flows.

Figure 4: Has (or would) a lack of trust in the ESG investment framework used by your investment provider ever prevented (or would prevent) you from investing a financial asset?

Figure 5: Have you ever read an ESG report related to one of your investments? If yes, were you satisfied with the contents of the report?

Part 3: Upcoming Blog Series

To explore further ESG investing in the retail landscape, we will be sharing the outputs of our survey in a 4-part blog series discussing how investment managers and platforms can capitalise on this unique growth opportunity. Over the coming months, we will be releasing blog posts on the following topics:

• Growing Wallet Share through ESG Investing and Customer Segmentation – While ESG investing can be attractive to most retail investors, our research has shown significant differences in consumer attitudes and needs based on age and income levels. When deciding whether to enter or expand further into the retail ESG investing market, firms will need to carefully consider which consumer segments to target to ensure success.
  
  
• Making ESG Investing an Easy Choice – Our team has noticed a tension between the fact that most UK retail investors do not read lengthy ESG disclosures and/or investment reports but have or would refrain from investing if they did not trust the underlying ESG investment framework of their provider. Resolving this tension will require investment providers to build trust while positioning their ESG funds in a digestible manner for retail investors.
  
  
• ESG Investing Proposition Design – To support customer acquisition and build trust in their products, providers will need to think about the practicalities of setting up an ESG investing proposition. In this blog, we will explore the big decisions providers need to make about their proposition and their use of data & technology to build effective ESG investing propositions.
  
  
• Is ESG the next mis-selling scandal? – Finally, given the limited scrutiny of retail investors into their ESG investments, there is room for ill-intentioned investment providers to ‘greenwash’ their traditional investment funds and charge higher fees. This is raising concerns relating to the FCA’s Consumer Duty regulation.

[1] Investment Association, Retail Fund Sales, https://www.theia.org/industry-data/fund-statistics/retail-sales/18

[2] Survey of performed in July 2022 with 996 UK-based retail investors defined as investors aged 25 and above with investment portfolios ranging from £10’000 to £250’000.

[3] Impact is defined as the positive societal value brought by investment activities. We will here use the term of ‘ESG’ (Environment, Social & Governance) as a measure of that ‘positive impact’.

[4] Make My Money Matter, November 2022 Climate Action Report, https://makemymoneymat.wpenginepowered.com/wp-content/uploads/2022/11/Climate-action-report-%E2%80%93-November-2022.pdf

[5] We used March 2020 as the reference date for the start of the COVID-19 pandemic in the UK.

[6] Financial Conduct Authority (FCA), PS21/24: Enhancing climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers, https://www.fca.org.uk/publications/policy-statements/ps-21-24-climate-related-disclosures-asset-managers-life-insurers-regulated-pensions

[7] ‘Greenwashing’ can be defined as deceiving customers into thinking a product is environmentally friendly when it is not.