When looking at investment offerings and flows of money into sustainable investment, large institutions and pension funds are leading the way where retail clients and wealth managers are lagging behind.
The minimum standards accepted by institutions such as charities have always been high.
They demand transparency throughout the investment process and as it becomes increasingly clear that sustainable factors aid performance and align more closely with the interests of clients, it becomes a fiduciary duty – rather than a nice-to-have – that this demand is met.
This causes a trickledown effect as asset managers looking to progress through the tender process must prove that they can manage money to this new standard.
To this end, wealth managers struggle for two main reasons. Firstly, the resource required to implement a high level policy, such as voting on all company resolutions, is high. Smaller firms and unsophisticated investors do not have the means to enact many of the best practices seen at larger institutions.
An option here is to outsource. There is a growing market of industry specialists that can help with areas such as screening or voting in resolutions.
However, this does require initial investment and capital is often constrained with other calls already on it. Many sustainable/ESG factors are by their nature hard to assign an economic value to which can hinder the investment decision.
Over time, as progress is made in data collection and interpretation and the demand from clients continues to grow, the positive value will become clearer to senior management.
The second main challenge for wealth managers is the values-based aspect of sustainable investment and producing an investment offering that is suitable for all clients.
While a blanket ban on a certain type of investment may be possible for a pension fund, it is not suitable for a business serving many different views. Historically, it would have been fair to argue that the range of investment products available in this space was rather limited, but as this is no longer the case, new solutions have to be found.
Looking to the future
Sustainable investment may have been ‘trending’ 200 years ago but it looks to still be in its infancy. The benefits can be hard to value and the jargon confusing, but the drivers are powerful and broad.
Investors are reconnecting with what it means to invest, not just trade, and demanding more from the use of their capital. Integrating ESG factors into an investment approach can help enable this.
As one of the fastest growing areas of investment, any adviser would be well advised to explore sustainable choices moving forward.
Paul Weyers is a senior fund manager at Brown Shipley
