Wealth managers need to put ESG into practice

Despite rising energy costs and economic uncertainty caused by the Ukraine crisis, interest in environmental, social and governance (ESG) investment options among the wealthy is likely to only increase in the coming years. coming.

A survey of millionaires by Savanta found that providing ESG investment options is extremely important to one in four UK millionaires.

Investment providers recognize the choice their clients are making, with 41% of wealth managers responding to this year’s Private Client Wealth Management survey saying they think offering ESG options is extremely important, 44% very important and 15% moderately important. This suggests that sustainability should be a priority for wealth management companies.

In particular, there are few signs that the current economic and political climate is leading to a decline in interest in environmental issues – despite claims by energy companies and governments that Moscow’s attack on Ukraine puts highlights the need to diversify oil and gas supplies away from Russia.

On a personal level, wealthy individuals clearly contribute disproportionately to climate change through above-average carbon dioxide emissions and are the least likely to suffer from its effects. They are uniquely positioned to make an impact on reducing emissions as the UK aims for net zero.

The importance of ESG to the wealthy suggests that there is a desire to contribute to a more sustainable future. It’s welcome.

This year’s survey of wealth managers shows further positive signs in this regard: 79% of the 27 companies we spoke to believe that interest in ESG among wealthy clients will increase over the next 12 coming months.

Granted, there is a minority of wealthy people who aren’t as interested in ESG investing options, with 13% of millionaires saying it’s not important to them and another in 10 saying it’s only slightly important.

But these people tend to be older, and the figure of three in five wealthy people who told the millionaires survey that ESG is moderately, very or extremely important to them is driven by younger people. This suggests that over time interest in ESG investing is likely to increase as family wealth is passed on to younger generations in the coming decades and new young entrepreneurs join the ranks of the wealthy.

For these investors, the Ukraine crisis has highlighted that sustainable practices are more relevant than ever, with European governments planning to move away from Russian gas and accelerate their transition to green energy.

When we at Savanta spoke to wealth managers over the past two years, it became clear that proving their commitment to sustainable practices is at the forefront of their strategy. This is definitely good marketing by heritage companies.

However, very few wealth management advisors excel when it comes to providing effective and transparent ESG-focused asset management.

EY, the management consultancy, raised questions about the industry in its 2021 sustainability report, an annual global review. He pointed to a lack of environmental disclosure among wealth managers, as well as a failure to organize external audits of their sustainability reports. The lack of transparency around sustainability does not reflect the industry well.

Meanwhile, accusations of greenwashing ESG investment offerings have increased dramatically. Difficulties exist in measuring the impact of ESG at company level and in deciding which companies are included in ESG indices and on what criteria. Arguments have become very public, for example on the role of index providers in compiling ESG indices.

Even law enforcement agencies have become involved in ESG issues, with DWS, the Deutsche Bank-controlled wealth manager, raided by German police over allegations that it made misleading statements in its 2020 annual report and to potential clients regarding the amount of assets in ESG funds. DWS says it is cooperating with the probe and stands by its reports.

Unless wealth managers respond to interest in ESG in a practical and measurable way, investors may become increasingly skeptical when investment providers talk about sustainability. There are many ways for them to improve their internal reporting standards on issues such as the share of ESG assets under management or to invite external scrutiny of their sustainability reports.

Decisive action would benefit wealth managers who act first in the long term, as potential clients learn to distinguish managers who apply ESG standards correctly from those who do not.

When it comes to ESG, now is the time for wealth managers to walk the talk in a transparent, meaningful and measurable way.

Chris Stocks is a consultant at Savanta

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