“This expert says one thing, while another says he’s wrong."
"This new solution is launched, and immediately someone says it has been green-washed. This ESG fund was performing well last year, but this year it is not. This research company says the other is no good.”
“There was a climate agreement in Scotland, which sounds like a good thing, but my kids say that it was a bad thing. What if I recommend a ‘sustainable’ solution and it turns out not to be?”
It is no wonder that so many people in our industry appear to have taken the decision to simply wait until there is regulation and ‘they’ have sorted it all out.
All of us suffer from the psychological tendency to not act when there is too much choice or information.
With a principles-based regulator, the regulation is already here.What’s particularly interesting to me is why there is suddenly so much interest and information, and so many experts and opinions. I am not an expert. I rely on my team at Dynamic Planner for that.
But I knew about global warming as a student, when there were rallies and campaigns. Ironically, these tended to be overshadowed at the time by protests against coal mines closing and the dangers of nuclear power. Some people went to all of them – students love a march and a placard.
In fact, global warming was discovered in 1861. A consensus that it was fact was reached when I was in school.
Shockingly, the ‘inconvenient truth’ voiced by an American vice-president was all the way back in 2006, 15 years ago. So what has changed? Why the sudden momentum shift?
Could it be magic?
Well, I think it’s something magical, so much so that, if they had made a film about it in the 1980s, this would be the surprise happy ending: namely, that all those students and others that stood and campaigned for action on global warming for decades have, over just a few short years, seen the free market and capitalist machine walk across the road and stand by their side.
Evidently far more powerful than a vice-president, the capitalist free market economy is an instant democracy.
Through the mechanisms of the asset management industry, it takes your clients’ investment preferences and your investment recommendations and aggregates that up into a voting block that every board member and decision-maker fears.
The UK is the sixth largest economy and the second largest asset management industry in the world, and of course most providers are global.
When viewed on that scale, it therefore doesn’t matter if occasionally an ESG score is incorrect, somebody gamed the system, or it turns out your opinion was wrong and the other person was right.
It’s completely unimportant if this one thing we thought was good for the environment turns out not to be. Nobody will judge you for getting the detail wrong with hindsight. Where they will hold you accountable is whether you played your part in the system that can actually make a difference.
“Yeah, but I will still wait for the regulation because someone will judge me.”
There is no reason to let the idea that these things will change over time stop you from considering them now.But, with a principles-based regulator, the regulation is already here. In both [the Financial Conduct Authority's] Product Intervention and Product Governance Sourcebook and the Conduct of Business Sourcebook, you are required to gain sufficient manufacturer and client information.
You need to understand the individual client or target market client’s risk profile, needs, objectives, and importantly their preferences. I do not think you need to be explicitly told that sustainability is one of the preferences.
With all the coverage on the TV, Internet and social media, it is implausible that, right now, the client does not have a preference on this issue, and advisers should start using the tools available to understand those preferences in a robust and consistent way.
Everyone has a view
Everyone has an opinion and naturally you will believe that mine is worse and less informed than yours. The system does not require everyone to put all their money in the one investment that saves the planet.
Indeed, if that happened it would break the system. It is entirely okay for those people who don’t have a preference to largely ignore sustainability or environmental, social or governance factors in the selection of their solution, just as those who feel strongly about it deserve to have their preferences respected and considered.
This second group will be enough to turn the dial, and we can already see that companies and asset managers are leading this and making changes in anticipation.
Yet sustainable investing needs to be sustained. It cannot be a fad.
It is not going to work if investors are ‘going green’ for performance reasons or short-term social pressures, and then switch back. The movement of capital needs to be permanent if it is going to drive the lasting change that’s needed
With the Retail Distribution Review, the sunset clause and Mifid, we knew change was coming years in advance, but as an industry we mostly carried on as we were until the last minute.
This was partly driven by the view that: “If other advisers aren’t doing it why should I?” It was partly driven by seeking out commercial advantages, and to see if the proposed legislation or regulation changed.
This time, in a post-RDR and Mifid world, there is no commission to lose and no real additional work to undertake. As we enter a probable lower returns environment, sustainability provides an opportunity to talk to your clients about something other than past performance to demonstrate your value.
There is still a habit of selecting solutions based on past performance. If you recommend a solution because of its performance ranking or measurement today, is that more or less likely to still be true at the next annual review than its sustainability or ESG ranking or measurement?
Many of us are playing catch up and looking for simple, sensible solutions.I am fairly sure that the sustainability or ESG result is more likely to still be true. There is no reason to let the idea that these things will change over time stop you from considering them now, particularly when you review the suitability at least once in every 12 months
Yes, of course we can see people jumping on the bandwagon. Yes, this subject is a sales and marketer’s dream. Yes I am trying to sell you my system. Why should that stop you? The weight of capital is moving and that can only be a good thing.
I cannot imagine that we will over invest in solar and use up the sun’s energy, or invest in nuclear fission and destroy the world, or hydrogen in the gas mains and blow up your street.
Quite frankly, if we do, then a complaint that the ‘sustainable’ solution turned out not to be sustainable would be the least of your problems.
I know how uncomfortable it feels not to be an expert in a particular investment factor and not know what to do. Many of us are playing catch up and looking for simple, sensible solutions.
At Dynamic Planner, we’ve produced a guide to help advisers explain it all to clients, alongside a psychometric questionnaire to understand your client’s sustainability preferences, built MSCI ESG manufacturer’s information into our system to make it easy.
We have even structured our system around PROD so that you can research sustainable solutions for the relevant target market and legitimately reuse that work for those individuals.
At the risk of jumping on another bandwagon, I’ve likened us to Q at MI5. The tools and gadgets are available now. All you have to do, Mr Bond, is to use them, go and save the world, and look good doing it.
Chris Jones is proposition director for Dynamic Planner
