• Rob Norris, Chris Senackerib, Efraim Stefansky, Alex Gellman, Pablo Wenhammar, Matthew Trummer
  • Published: 19 July 2022

ESG and Roboadvising, two of the most significant wealth management trends of the past decade, are colliding, providing huge opportunities for the firms that can best integrate them. How can U.S. firms seize the initiative to ensure they make the most of these market shifts?

The 21st century has been a time of tremendous upheaval and opportunity for the wealth management industry. The rise of digital channels and FinTech have enabled an explosion of new products, business models, and delivery channels that have expanded wealth management far beyond the traditional notion of meeting an advisor in person to discuss risk and return. 

Two of the most significant trends to emerge from this shift have been automated “roboadvisor” portfolio managers and investing based on Environmental, Social, and Governance (ESG) factors. Both trends have been supercharged by in the United States the rise of digital-first, values-conscious millennial investors, who are expected to only grow in importance as they benefit from a coming $70+ trillion intergenerational wealth transfer, as well as by broader industry trends toward digitization, the growing market power of women, expected declines in advisor headcounts, and hyper-personalization in investment options. Roboadvising and ESG are key growth trends for various types of investors and wealth advisory firms should ensure that they are thinking about how they can build out their business to meet this growing interest.

Investments in both roboadvising and ESG have accelerated dramatically in recent years. Total AUM among roboadvisors is expected to top $1.8 trillion in 2022, a sixfold increase over 20171,  while over $650 billion flowed into ESG-focused funds in 2021, more than twice the asset flows seen in 20192.  ESG investment options are rapidly moving from niche offering to table stakes for wealth managers, and roboadvisors in particular will need to keep pace. 

As digital-first providers explicitly target millennials, roboadvisors must find ways to offer compelling ESG options to their clients or risk losing assets to more dynamic competitors. There may be no single agreed definition of what constitutes “ESG,” but there are clear keys to building strong ESG investment options. By ensuring ESG offerings are tailored to their client’s needs and providing transparency into how those investments are selected and vetted, roboadvisors can match millennials’ expectations and position themselves to capture the tremendous growth opportunities on the horizon. 

A Wide-Open Playing Field

While sustainability and ESG have been hot topics in the investing and roboadvising space for nearly a decade, offerings across the industry vary widely in maturity. Front-runners in providing their clients with the strongest ESG investing options are mainly roboadvisors that specialize in sustainable and social impact investing. They generally offer a high degree of transparency and detail on each investment option and make it easy to allocate funds to specific social and environmental causes. Elsewhere, roboadvisors that primarily service Gen Z, women, and other traditionally under-served customers tend to offer more streamlined ESG options, while also prioritizing transparency and user-friendly investing platforms. In contrast, some of the largest industry players lag, generally opting for more limited ESG options, while some lack sustainable choices altogether. Some feature only token or potentially “greenwashed” investment options, as well as barriers to investing, such as unclear ESG metrics and definitions, or a lack of transparency and details.

This suggests the ESG roboadvising market hasn’t received the attention it deserves from most larger financial institutions. The roboadvising platforms provided by some of the biggest financial household names are among the most lacking in terms of options to allow investors to easily purchase ESG-specific portfolios. In contrast, the most ESG-friendly platforms generally belong to smaller, less recognizable firms with lower AUMs. All this points to an opportunity to capitalize on the trending growth in ethically-driven investing, and capture market share as more young adults enter the marketplace with an eye toward socially responsible and sustainable investment options. Large financial institutions that can operate at scale have a particularly big opportunity – building a strong ESG offering (or acquiring a rival ESG-specific firm) can give them an edge against both established rivals slow to build out ESG products, and against innovative upstarts who lack the name recognition to reach significant numbers of mainstream clients. 

The roboadvising platforms Capco identified as having the most robust and customizable ESG offerings manage only around $100M each in assets based on their latest SEC filings. While they provide the most ESG-friendly platforms, there is often limited functionality or different features for investing in non-ESG options. Therefore, investors that want both a strong ESG platform and access to other non-ESG investing options may find themselves at a loss, and could need to open multiple separate accounts to meet their goals.  It would behove the largest wealth management firms with robust roboadvising platforms to take a look at how they can expand the ESG capabilities available on their platforms to capture market in this growing area of investment.

Transparency, Variety and Goal-Compatibility are Key

How can they best do this? By offering transparency and variety in their ESG offerings. Wealth advisory firms differentiate themselves in the ESG space by providing clear investment transparency, with most of the top ESG roboadvisors clearly defining their approach to ESG on their website. This is important, as each investor is looking for something different when they invest in ESG. As long as the platform is transparent with their offering, customers can determine if the product will allow them to invest in-line with their beliefs. Likewise, roboadvisors need to be transparent about if and how ESG choices could impact a client’s financial goals. ESG investors may be looking to make an impact, but they generally do not want to sacrifice their other goals to do so3, and any trade-offs in risk and/or reward need to be made clear.

When it comes to making their investment, there are many different types of products and approaches they can be offered. Some roboadvisors offer themed funds that relate only to a portion of ESG (e.g., solar / renewable energy funds; Diversity, Equity and Inclusion funds; etc), others use negative or positive screens, while some use direct indexing (e.g., customizing an index to include/exclude stocks or utilizing alternative weightings). Roboadvisors should choose a strategy that fits the needs of their client base. Regardless of which strategy is selected, firms should ensure that clients are able to easily select the ESG option when signing up for an account and be able to discern easily how the roboadvisor screened for the stocks or funds in the selected offering.  

Firms Must Upgrade to Remain Competitive

It’s clear that all roboadvisors need to be thinking about how to upgrade their ESG offerings – laggards need to catch up to avoid missing out on market growth, those with token offerings need to invest to differentiate themselves from the pack, and leaders need to continue to expand and refine their products to stay a step ahead as the sector evolves. The same lack of ESG standardization that can make the sector confusing, also leaves firms with a huge sandbox in which to experiment. By working to thoughtfully integrate sustainable investment options into their portfolios, roboadvisors can in turn ensure the sustainability of their own growth.