Clients’ interest in both ESG and cryptocurrency investments took a hit recently, according to a study released today by the Journal of Financial Planning and the Financial Planning Association.
During the last four years, advisor interest in environmental, social and governance (ESG) investing has remained stable, but a growing number of advisors now indicate they may decrease ESG investments over the next 12 months, according to the “2022 Trends in Investing Survey.”
When the survey first included questions on ESG investing in 2018, 26% of advisors indicated they were using or recommending these investments to clients. That percentage grew to 38% in 2020 but leveled off at 32% in 2021 and 34% in 2022.
It now “appears advisor sentiment on the asset class could mean less use by advisors moving forward,” the study said. Those planning to decrease their use or recommendation of ESG assets over the next 12 months are still in the minority, but the percentage of those planning to decrease has more than tripled to 15% in 2022, from only 4% in 2021.
“Client interest may be fueling this potential shift away from ESG. More than 31% of planners said they fielded client questions about ESG investing in the past six months, down from roughly 39% in 2020 and 2021,” the survey said. The survey included 413 financial advisors of different backgrounds and business models.
Sometimes the missions of ESG investing “come with higher investment costs and slightly trimmed investing returns,” said Dr. Preston Cherry, practitioner editor of the Journal of Financial Planning, in a statement. “If ESG investing has reached an inflection point, it could be due to several factors, including higher fees, lower performance or a lack of ESG impact and index differentiation that inspires investment.”
The survey also showed that, while 17% of advisors have started looking into ESG strategies, they don’t plan to make any investments in the next three years. In addition, 45% said that asset managers and portfolio management teams with ESG expertise are the best source of ESG data, but one quarter of advisors said they rely on third-party raters to evaluate funds.
Of those interested in ESG investing, clean energy is the top objective of investors, over the next two areas of interest—water management and sustainable transportation and infrastructure. Nearly 19% of advisors said they look for funds with assets that help the community, while 15% said they use funds that screen out assets that are perceived to cause harm to communities.
The survey also looked at advisors’ use of cryptocurrency investments, which showed “notable shifts in advisor use and sentiment,” the survey said. “In 2021, 14% said they used or recommended cryptocurrencies, which was a significant jump from 2020 when less than 1% used or recommended them. This year, only 11% said they use or recommend them. While 13% plan to increase their use over the next 12 months, 11% plan to decrease their use over the same period.”
The survey also said client interest in cryptocurrency investments has remained nearly the same. Forty-seven percent of advisors said they received client questions about cryptocurrencies over the past six months, compared with 49% in 2021.
“The survey results clearly show clients continue to be curious about cryptocurrencies. But they need to work with their advisor to ensure they are behaviorally sound, receive objective advice, and invest within their risk tolerance and capacity,” Cherry said.