The survey of PIMFA members, conducted in association with Alpha FMC, a specialist management consultancy for the wealth and asset management industries, found the ESG data market is becoming increasingly challenging for firms to navigate. As a result, only a minority (7%) of firms feel they are doing an excellent job of educating their clients on Sustainable Finance and ESG investing, as firms are unclear on the different rating systems and methodologies they should use.
PIMFA members reported data vendors providing a range of products and services, each with their own methodologies and standards. Still, they rarely offer ‘a one-size fits all’ set of standards to cover the full array of asset classes and investment products.
This is leaving firms in a difficult position as to how best to use different data or reporting processes, each with their own nuances, and all the while still having some gaps to fill, the report found. It is positive to see that the UK’s Financial Conduct Authority (FCA) has recognised this and has established an independent working group to develop a code of conduct for ESG data and ratings providers.
It comes as client demand for ESG investing products and services has surged. Of the £6.2bn net inflows into UK based-equity funds in the second half of 2021, 50% flowed into funds focused on ESG factors (1) representing a significant opportunity for firms to deepen their client relationships and provide a new source of organic growth and revenue.
Over two thirds (69%) of respondent firms said they are taking into account their client’s ESG investing preferences when assessing suitability. ESG investment strategies that are proving the most popular remain negative screening (71%) and thematic investing (69%). But more advanced techniques, such as impact investing, are growing in prevalence (48%).
PIMFA members also reported a lack of consistency in ESG terminology is further making it harder for firms to support their clients in understanding this topic. But forthcoming regulation is causing apprehension, wealth managers are still unsure how the FCA's recent proposals will impact them while prohibiting the use of certain terms is the biggest concern for wealth managers and adviser who see doing so as adding to the challenge of providing meaningful reporting to clients.
In response to some of the findings PIMFA has launched a new microsite designed to provide further information on Sustainable Finance and ESG investing with details of the regulatory being undertaken at both a national and international level, details of how to get involved in PIMFA’s Sustainable Finance Working Group and information about the Government’s Green Finance Strategy.
Maja Erceg, Senior Policy Adviser at PIMFA, commented: “There is clearly a significant opportunity for wealth managers and advisers to provide their clients with Sustainable Finance and ESG products and services. It’s also clear wealth managers and advisers want to provide such services. But as our survey has found there is confusion around data and methodology, as well as well as the correct language to use when describing such services.
“The proliferation of ESG definitions and interchangeable language used throughout financial services has caused confusion for clients and wealth managers and advisers feel they are being left to tell clients what ESG means. Clearly there is a need for standardisation both in terms of how data is used and the methodology for collecting that data and the terminology to describe ESG.
As ever PIMFA will continue to work closely with member firms, the Government and regulatory bodies to address these key areas for supporting ESG investing.”
Kenn Taylor, Director and Head of Wealth at Alpha FMC, commented: “We are delighted to have worked with PIMFA on this membership survey to better understand the ESG investing approaches amongst wealth managers. The results show many firms have taken positive steps in this space but highlight the need for continued product innovation to keep up with client demand and support with education on the topic.”
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