Wealth manager and financial adviser sentiment towards ESG has worsened amid poor performance, slowing client demand, and persistent scepticism, according to the Association of Investment Companies (AIC).

Its ESG Attitudes Tracker found that pessimism about the performance of ESG-focused strategies had hit record levels, with just 10 per cent of intermediaries expecting ESG investing to improve performance.

Meanwhile, more than half (51 per cent) forecast ESG-focused strategies to worsen returns, resulting in a net favourability score of -41 per cent.

Sentiment towards ESG has been on a downward trend since 2021, when a net 31 per cent of respondents expected it to improve performance.

“Intermediaries perceive ESG strategies to have lost money and their patience is wearing thin,” said AIC research director, Nick Britton.

“Ongoing concerns about greenwashing don’t help, and knowledge of the new sustainability labels is still low.

“The bottom line is that if intermediaries see a trade-off between ESG investing and returns, then returns are going to come first, unless clients have specific ESG requirements.”

The research, conducted by Research in Finance, found that just 11 per cent of clients proactively raise the subject of ESG in meetings, down from 13 per cent in 2024 and 20 per cent in 2022.

Furthermore, the proportion of intermediaries who anticipated ESG demand to increase over the next 12 months has fallen to 34 per cent, down from 60 per cent last year.

The percentage of wealth managers and financial advisers who expected demand to decline rose from 10 per cent to 24 per cent year-on-year.

While only 1 per cent of intermediaries had ‘complete trust’ in the sustainability claims made by funds, this was an improvement from 0 per cent last year.

The Financial Conduct Authority’s sustainability labels were having some impact, with 28 per cent of respondents saying they had improved their trust in such claims.

However, 60 per cent said the sustainability labels had not had any impact on their trust of sustainability claims.

More than two thirds (68 per cent) said they had not used any of the labels yet.

In light of these developments, intermediaries’ general opinion of ESG investing has fallen for the first time in four years, with 34 per cent of respondents stating their opinion had become less favourable, while just 14 per cent had adopted a more favourable view.

Despite the findings, 96 per cent of financial advisers and wealth managers recommended sustainable funds, up from 89 per cent last year.

Client assets in sustainable funds remained similar to previous years at 16 per cent.

While over half (54 per cent) of intermediaries offer ESG investing to clients depending on their goals and objectives, 27 per cent said it was an embedded part of their philosophy and process.

Wealth managers and advisers felt that ESG reporting had improved, with 54 per cent saying all or most of it was satisfactory, an increase of 12 percentage points from 2024 and the highest figure since the tracker was launched in 2021.

Although intermediaries still preferred engaging with companies over excluding them from portfolios, the gap has narrowed.

Given a binary choice between the two approaches, 50 per cent of respondents favoured engagement and 39 per cent preferred exclusion.

“The question of engagement versus exclusion divides intermediaries,” Britton stated.

“While most still like the idea of engagement in principle, there are also murmurs of doubt about how effective engagement is and whether asset managers are prepared to divest if it doesn’t work.

“That scepticism could be behind the rising interest in exclusion, which is a simpler approach for funds to demonstrate and for advisers to explain to clients.”

---