The environmental, sustainable and governance (ESG) acronym is at odds with sustainable investing NextWealth warns.
Its Sustainable Investing Tracker Study is the fourth in a series of reports that tracks how sustainable investing relates to the advice profession.
Advisers highlight how use of the term ESG in client conversations is at odds with how investment providers define it.
As a result NextWealth has replaced the ESG descriptor from its latest tracker report with “sustainable”.
Its managing director Heather Hopkins said: “Our research shows that use of the term ESG has different meanings for different groups.
“Investment providers use it to describe an objective measure of risk but advisers regard it as a label for sustainable investing. Using it for both is creating confusion.
“Asset managers often tell us their funds are fully ESG integrated, that ESG considerations are built into their decision-making process.
“When an adviser talks to a client about sustainable investing, the conversation isn’t about the ESG risk factors that might influence the future price of a stock or fund.
“Instead, it’s about making choices about how capital is deployed to align more closely to values. This distinction is hugely important and is the reason we are dropping the ESG label in our tracking reports.”
The report found that adviser confidence is low relating to sustainable investing.
About half of the 200 financial advisers surveyed for the report said they are very confident or confident in the steps of the advice process relating to sustainable investing.
That includes understanding client preferences, researching products, recommending products and reporting to clients.
Nextwealth believes it highlights a significant gap and suggests more support is needed from product providers.
In addition, only 36% of advisers reported being either very confident or confident about on-going report against sustainable investing objectives. One fifth said they were not confident at all.
The research also found that environmental dominates client concerns when it comes to sustainable investing.
Yet, only 18% of client assets are in sustainable funds or solutions. It is down from 21% in 2021 but still higher than in 2020 when it was just 12%.
Most asked sustainable preferences by clients
A core-satellite approach, with sustainable investment solutions sitting alongside advisers’ core investment proposition continues to grow in popularity. It rose to 66% in 2022 from 56% in 2020.
Hopkins added: “Our report highlights there is still plenty of confusion among advisers about how best to understand and serve clients on issues relating to sustainable investing.
“What’s crystal clear though is that use of the term ESG means different things to different groups.
“This has to be addressed so advisers can give their clients what they want with confidence.”