Millennials are driving demand for ethical investment but advisers are failing to keep pace with the trend, according to Schroders’ global head of stewardship.
Speaking at Schroders’ Manchester Investment Conference last week, Jessica Ground pointed to the fund group’s own research which showed a disconnect in the importance of ethical investments between investors and advisers.
Investors ranked it at 6.1 out of 10 in terms of importance, but advisers only ranked it 5.4.
Schroders’ Global Investor Studies for 2016 and 2017 revealed 67 per cent of UK investors said sustainable investing was important to them and were willing to hold sustainable investments for two years longer than the average investor.
Millennials in particular were a strong driving force, with more than half - 52 per cent - said they were already investing sustainably.
Ms Ground suggested part of the problem for the disconnect between investors and advisers was lack of clarity over what an ethical fund was and how it could be expected to perform, given the lack of universal definitions.
She said: "Most sustainable labelled funds revolve around ethical exclusions and the problem is that they aren’t necessarily very consistent definitions for those. So, even if I look at a sector like the IA Ethical Sector, you have vastly different approaches.
"In the UK, the most conservative dark green fund has an opportunity set of just about 25 per cent of the market. Unsurprisingly, then, a fund like that can have quite a volatile performance and is not going to deliver in all market environments."
Ms Ground added that about half of global investors Schroders surveyed wanted to back businesses making proactive positive change, rather than just excluding the controversial ones.
"That is something that we think chimes well with what is going to create long-term sustainable value," she said.
Ms Ground talked about a "perfect storm" of accelerating change including technological change, global challenges like tackling climate change, and greater regulatory scrutiny, combined with more pressure from UK investors who cared about sustainable investing.
But as well as the labelling problem, Ms Ground said there were other hurdles to more widespread ethical investing.
Institutional investors cited performance concerns, lack of transparency, and the problem of measuring and managing risk, although cost was seen as less of an issue.
Globally, 20 per cent of institutional investors simply said they "did not believe in sustainable investments".
Andrew Macintyre, chartered financial planner at Alan Steel Asset Management, agreed there was growing demand from clients for these investment strategies, and said advisers were behind the curve.
He said: "There is clear and growing demand for fund managers to invest responsibly and to use their position as large shareholders to drive good governance and social outcomes. You only have to look at the number of recent ESG fund launches and new ESG policies being put in place to see that fund groups recognise this.
