Wealth managers failing to adapt to ESG needs face client exodus

18 May 2021 Consultancy.uk 4 min. read

In the face of continued concern about the sustainability of economic activity, just under half of investors still feel wealth managers do not adequately understand their ESG goals. As a result, more than one-third of ESG conscious clients are looking to change their wealth managers in the coming three years.

In recent years, environmental, social and governance (ESG) has become increasingly important to the investment community, particularly for large pension, sovereign wealth and the concerned ultra-rich, whose capital has considerable influence on how the economy impacts the wider environment.

As documented by EY’s annual Global Wealth Research Report, ESG has long been rising up the corporate agenda, with previous years of the study finding that investors were increasingly echoing calls for greater CEO and board accountability regarding the externalities of their companies and respective supply chains.

The proportion of clients who indicated they have sustainability goals, and whether their wealth manager can do more to understand those sustainability goals

While many might have expected ESG goals to fall down the agenda in light of the global pandemic and accompanying recession of the last year, EY’s latest edition of the report finds the opposite to be true. Based on a detailed survey of 2,500 wealth management clients in 21 geographies, the 2021 study from the Big Four firm found that clients are now investing for purpose, and looking beyond return on investment in purely financial terms.

To be ‘purpose-led’, an organisation needs to stand for something it believes in, going beyond profit and looking to positively impact society – something becoming increasingly popular to consumers.

According to EY, the mounting desire among consumers to see purpose led companies thrive has transformed mainstream investment sentiment. Now, 78% of wealth clients worldwide have goals related to sustainability in their lives, while 62% of clients, regardless of age or gender, have goals related to generating a legacy.

The changing role of sustainability in a client’s personal wealth management

To an extent, the importance of sustainability and legacy among clients is prompting a response from wealth managers. EY found that more than half of clients around the world feel wealth managers understand their ESG goals, with 54% saying as much. Unfortunately, a sizeable minority of wealth managers could still do better, however. A hefty 41% said their wealth management provider could understand their sustainability and legacy goals better, and a further 5% said firms do not understand them at all.

This should be cause for alarm for wealth managers who have been slow to adapt to purpose driven investment in recent years. As it stands, EY found that 35% of clients who have sustainability goals are currently looking to switch wealth managers in the next three years. In comparison, just 15% of those without sustainability goals are weighing up such a change – so wealth managers will need to do more to hang on to sustainability conscious clients than they are at present, or risk sizeable losses.

At the same time, a generational gap in attitudes should further alarm wealth managers. The younger the client, the less likely they are to feel enough is being done about sustainability – and while a majority of 57% of Baby Boomer investors feel their ESG goals are supported, only 49% of Millennials said the same.

Time is not on the side of the former demographic, and so as one quarter of Millennial clients see sustainable investment propositions as the most important factor when selecting a new wealth manager, firms in the sector will need to ramp up their ESG efforts to avoid greater client losses in the not-so-distant future.

Reasons for selecting a wealth manager

With regards to just how drastically changes to the wealth management market could be in the coming three years, EY suggested that the traditional approach to wealth management could be haemorrhaging clients by 2024.

On a global level, clients of conventional wealth managers could fall by 16% by then, while firms that engage in positive screening (selecting companies that set positive examples of environmentally friendly products and socially responsible business practices) will enjoy a 23% spike in clients, and impact investing – investments made to generate specific social or environmental impact alongside financial returns – is expected to grow an eye-catching 15%.

These changes are likely to be most pronounced in Europe and Asia Pacific, with traditional wealth managers enduring a 22% and 25% slump on clients respectively. Meanwhile, the boost to managers adopting positive screening or impact investing will be keenest felt in Latin America initially, enjoying corresponding boosts of 55% and 25%.