ESG discussions with clients lacking, research suggests

A secret shopper campaign conducted by a provider of ESG training suggests financial advisors can improve the service they provide to clients who are interested in sustainability.

Montreal-based ED4S Academy conducted the research in the first two months of 2024. Posing as customers, ED4S associates spoke to 40 Canadian advisors at 35 firms, including big banks, credit unions, insurance companies and smaller asset management firms. 

The secret shoppers had a background in sustainable finance, and the research results were released in a report on Monday.

The research found that 20% of the advisors (eight advisors) brought up ESG or sustainability considerations to the secret shoppers without any prompts. Once the secret shoppers showed interest in ESG issues, this metric increased to about 63%.

When the secret shoppers told the advisors that their primary concern was climate change action, an “encouraging” 25% of advisors were able to discuss client goals and investment approaches to address climate change, the report said. However, other ESG issues weren’t discussed, such as water, land use and pollution.

About half of the advisors (45%) demonstrated “sufficient” understanding of ESG investment approaches, the report said, and another 25% were “somewhat” knowledgeable.

An advisor’s knowledge was deemed “sufficient” if they demonstrated a basic understanding of sustainable investment issues or themes such as climate change.

“We did not expect encyclopedic knowledge of sustainability issues from advisors, but rather the ability to understand a client’s ESG priorities and propose appropriate investment solutions,” the report said.

As far as available products, while most advisors offered some ESG or sustainable investments, the secret shoppers considered those products a good fit 17% of the time, and “somewhat of a good fit” 39% of the time.

The research also found that about 63% of advisors (or about 25 advisors) discussed performance of sustainable investments. However, about one-third (35%) of advisors said sustainable fund performance was the same as that of other investments.

“The real answer to this question depends on the time frame, and how sustainable investment products are defined,” the report said.

In more than half of client discussions (55%), advisors did not discuss the fees of sustainable investments, the report said.

Given the overall findings, sustainable investments seem to be “a secondary consideration, if not a niche asset class” among the advisors studied, the report said.

Responsible investments accounted for 49% of assets under management in Canada in 2022, up from 47% in 2021, based on the 2023 Canadian Responsible Investment Trends Report. That report attributed the increase to a global movement to enhance sustainability reporting.

Such reporting wasn’t mentioned in the ED4S report. However, ED4S suggested firms ensure they have the sustainable investment products that investors desire.

It concluded that as sustainable investment products become more common and well-defined, “investors and advisors need to have the conversations necessary to align investment objectives with the products available.”