RIAs fear broaching ESG topics with clients amid blowback, but 'do-the-right-thing' investments are still big business, Cerulli shows

RIAs and investors are walking on eggshells around each other when it comes to discussing ESG investing amid political and financial scrutiny. 

“My takeaway is investors would rather ‘do the right thing’ – but they are reluctant to bring it up with their [RIAs] if not prompted,” says Cerulli Director Scott Smith.

“On the other side, [RIAs] are leery of getting a second-level question from clients if they recommend ESG – So how exactly does this help?”

Yet, Cerulli's research shows that RIAs and asset managers with a little contrarian spirit can seize on the chaos because fear from the blowback is overblown and opportunity knocks.

“Interest in environmental, social, and governance-themed investment products has plateaued over the last two years, even among younger investors,” the Boston research firm notes in a release for “Cerulli Edge—The Americas Asset and Wealth Management Edition.” 

“However, a large advice opportunity for the broader tenets of responsible investing still exists,” it adds.

Evaluating performance

Google, Walmart, McDonald's, Amazon, Ford, Lowe's, Boeing, Caterpillar, Harley-Davidson, and John Deere have all begun rolling back DEI (Diversity, Equity, Inclusiveness) initiatives, amid the Trump administration's push to do the same in the federal government.

Investment managers like Vanguard and BlackRock are also distancing themselves from ESG. See: Vanguard cites shunned founder Jack Bogle to deflect criticism after epic ESG flip-flop, extolling the founder's 'whole haystack' investing strategy versus finding the 'needle'

But other firms, such as Apple Inc., Costco, Goldman Sachs, JPMorgan Chase, and Microsoft, are standing behind their DEI programs. 

DEI and ESG mean different things but they overlap. 

DEI is a set of principles to create an inclusive workplace. Environmental, Social, and Governance is a framework for evaluating company performance – making it popular with some advisors, asset managers, and investors.

Businesses look to ESG and DEI as ways to be sustainable and ethical. 

All-time high

Yet, despite huge PR setbacks for ESG investing, the data shows that nearly half of investors still prefer ESG considerations in their portfolios.

'"Preference for ESG investing fell slightly in 2023, from 48% to 46%, amid increasing political and financial scrutiny," Cerullin writes.

However, a Morningstar report on global ESG fund flows found record levels of ESG investment. 

“Despite reduced fund flows, global sustainable fund assets reached an all-time high of USD $3.2 trillion at the end of 2024, an 8% increase from the previous year and more than quadruple the category's size in 2018,” the Morningstar report notes. 

“Europe accounted for the majority of the fourth-quarter inflows into sustainable funds, contributing USD 18.5 billion. This underscores Europe’s pivotal role in the global sustainable fund landscape,” the report underscores. 

Among investors under the age of 40 – the demographic most ESG-inclined – 66% still prefer “ESG-aware investing,” although that's down from 72% in 2022.

“Households in their 50s remain consistent at 44% support, with 13% expressing strong support,” it adds.

Not like 2020

The rampant conservative political unpopularity of DEI and ESG is unrepresentative of investor preferences, giving RIAs an “opening” for discussions, says Smith.

“This creates an opening for both advisors and providers to help interested clients find investments that cater to those values, thereby creating a more tailored portfolio solution while also getting to know their clients as people beyond a simple transactional relationship,” he says in the release.

Still, he says it's not like 2020 all over again.

“A sizable population of investors who place value in ESG screens still exists, particularly those centered on environmental and living wages." 

Weighing costs

In some ways, ESG is returning to where it had been for decades – more of a niche than a mainstream offering. See: Blacklisted 'woke' firms like BlackRock and State Street still have a lock on AUM in oil states like Oklahoma; anti-ESG politicians underestimated the fierce independence of state money managers and Republican lawmakers who back them

“Seems like ESG assets will concentrate among the truly committed managers and investors,” Smith says.

“For large-diversified managers, having to defend every ESG action is probably more trouble than it's worth for them in the short-term.

“Of course, this could backfire on them in the long run, but we as an industry (and society) rarely consider the true cost of these types of externalities – like global climate catastrophes.” See: Oklahoma bid to blacklist BlackRock bombs in a big way, and the oil state may set back anti-ESG investing efforts in 19 other states