'Don’t be afraid to have conversations about transitioning brown companies'

The multi-asset analyst at Waverton Investment Management says recent market volatility has not waned her clients' enthusiasm for ESG, but it has meant clients have been asking for more diversified portfolios.

This has provided an opportunity to address more impact-focused strategies.

In a Q&A with FTAdviser In Focus, Jordan explains how Waverton diversifies a traditionally growth-focused ESG portfolio and why she agrees with the inclusion of non-financial metrics in the advice process.

Clients are aware that sustainability focused portfolios have been challenged this year and they are asking why.

FTA: What is your view on the state of the ESG market?

PJ: The ESG market continues to evolve, and with anything that is still fairly immature there can be rapid growth before consolidation.

We have seen this across the ESG approaches, frameworks and ratings agencies. This can create confusion for investors in the short term but the opportunity for investment over the longer term is abundant.

FTA: Financial markets are jittery, the cost of living is rising, what effect has that had on your clients’ enthusiasm for ESG investing?

PJ: We have actually seen this challenging environment push the conversation around ESG forward. The drivers behind client enthusiasm have not waned in this challenging marketplace but certainly the concerns around investing have risen.

One consequence of this is the desire for more diversified ESG portfolios, rather than traditional negative screening or sustainability approaches which can result in concentrated outcomes.

Clients are aware that sustainability focused portfolios have been challenged this year and they are asking why.

This has provided an exciting opportunity for other approaches – including ESG integration and transition – to be discussed, and even implemented.

FTA: How do you diversify in ESG exposure given most stocks are growth stocks by nature?

PJ: These days it is much easier to diversify ESG exposure and there are now plenty of exciting opportunities across all areas of the style spectrum.

The proliferation of engagement, transition and sustainable value funds has exploded in the short term and we expect this to continue.

Equally, this has brought the discussion away from purer, solution-only ESG stocks, and brought more focus to transitioning companies as we try and meet net-zero goals.

For example, to meet a number of our goals, we are going to need a huge amount of commodities. Consequently, greener commodity funds or climate-change-focused opportunities are now available.

The majority of greenwashing tends to be related to poor communication of an investment approach.

At Waverton, our approach focuses on ESG materiality and improving businesses, consequently we are able to avoid being shoehorned into one particular style.

FTA: There is still a perceived knowledge gap among advisers on ESG. What would help advisers advise on ESG?

PJ: It is no secret that advisers are pressed for time [and] spend an exceptional amount of time reporting.

Therefore, digestible ESG courses, conferences and a requirement to undertake a certain number of hours of ESG CPD as part of their existing CPD requirements would be a good start.

FTA: Do you have any tips for advisers on how to avoid greenwashing?

PJ: The best way to avoid greenwashing is to understand what type of ESG approach a provider is undertaking.

The majority of greenwashing tends to be related to poor communication of an investment approach, rather than actively trying to pull the wool over investors’ eyes. Reviewing investment processes and ensuring they align with the outcomes is integral.

FTA: The Financial Conduct Authority could make it mandatory for advisers to offer their clients access to ESG. To what extent do you agree with the inclusion of non-financial metrics in the advice process?

PJ: Clients need to be able to invest in a large market that can provide additional alpha, so ensuring those conversations have taken place seems sensible.

The path of least resistance may not be the best over the long term.

Additionally, the market is undeniably moving towards considering non-financial metrics because investors have started to understand that these non-financial metrics do have impact on share prices/bond valuations.

There is plenty of evidence to suggest that E, S, and G are material to a business’s financials, so this should feed down to the advice process.

FTA: How should the FCA enforce and police such a rule?

PJ: Policing ESG is exceptionally challenging given the nuances involved – client subjectivity, the very wide range of ESG investment approaches and the continually evolving products based on new research findings.

Therefore the Financial Conduct Authority may struggle initially as it is not a clear cut box-ticking exercise. Ensuring adviser/provider rationale is detailed, considered and robust may be the key focus.

Ultimately the FCA should consider enforcing this rule as invigilators marking an English exam, rather than a maths exam.

FTA: How do you prepare for the FCA's new rules?

PJ: At Waverton we are focusing heavily on ensuring that our MPS is fit for our advisers, both in the current sustainable finance disclosure regulation framework and in the upcoming sustainability disclosure requirements framework.

We have ongoing reporting to the board on our journey and have milestones in terms of what we want to achieve, including a key focus on how we communicate to investors.

FTA: What tips do you have for advisers on how to approach ESG with their clients?

PJ: The path of least resistance may not be the best over the long term. Asking screening questions may be more clearer cut and easier, but it can result in under-diversification, higher volatility and periods of deep underperformance.

As the experts it is our job to inform our clients of the range of ESG approaches, which on the surface may not appear to be deep green but can have a large amount of impact in improving the world – all while providing portfolio diversification.

Do not be afraid to have those hard conversations about the importance of transitioning brown companies to make the largest change.

carmen.reichman@ft.com