Governance is considered the “most important” element in relation to discussions about ESG, according to Architas.
The revelation comes in a global study on ESG investing by the asset manager, in which “honest and transparent accountancy” was ranked the most vital ESG factor in 10 of the 11 global markets surveyed.
This was followed by data protection and cyber-security, ranked as the second most important ESG factor in 8 of the 11 markets surveyed.
The finding challenges the notion that the environmental factor – which many in the finance sector think of when discussing ESG – holds the most importance.
“That governance is viewed as being so important is perhaps natural,” the report said. “High quality corporate governance is a foundation of trust when investors are parting with their money.
“Investing in well-run businesses could be perceived as basic business hygiene. After all, upholding fiduciary duties (looking after client money) and ensuring protection of personal data are legal requirements.”
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The report also insisted the industry needs to “go further” to better understand clients’ needs on ESG-related issues.
This should happen as the “debate moves increasingly into mainstream and retail conversations” to help educate those clients about how best to reflect those needs within their portfolios.
Architas’ research found a quarter of clients in Europe (26%) and Asia (26%) claimed not to have had a conversation with their adviser about ESG or responsible investment factors in the past.
Where conversations are happening, these are almost as likely to be initiated by the client as they are by the adviser.
It also found a “significant portion” of investors who do not currently hold an ESG investment (34% in Europe and 46% in Asia) will likely add one in the future.
Improved transparency is the top call to action to make ESG investing more attractive in both Europe (45%) and Asia (53%).
Improvements in product labelling (33% and 39% respectively) are also prominent retail investor demands in both regions.
The demand for ESG investments is rapidly increasing, and this is being reflected in the performance of ESG funds.
In 2020, United States sustainable equity funds outperformed their traditional peer funds by a median total return of 4.3 percentage points.
The performance of ESG funds over the past year has resonated with retail investors, 45% in Europe and 51% in Asia state that they would expect an ESG fund to outperform relatively to a non-ESG fund of the same risk level.
Just 9% and 8% expect and ESG fund to underperform respectively in each region. “Clearly investors no longer feel they need to compromise on performance to invest in ESG,” said Architas.
Matthieu André, chief executive of Architas said the publication of the report and its findings is “timely”.
“As the world looks to overcome and rebuild from Covid-19 in 2021 and beyond, ESG financing will be a key part of the recovery. In addition, net zero targets have now been set in place for all major economies,” he added.
“Capital flows and investor interest show we are passing a point of critical mass with ESG, so it is vital we set the right course now, to serve us well for the years to come.”
Recent research by Platforum found that although ESG investing is gaining momentum among advisers, there are “significant knowledge gaps” which need to be addressed.
