Life is tough for financial advisers.
Increasing regulatory requirements; challenging investment environments; competition from new technologies – each of these add to the pressures of running a successful advice business and serving clients well.
In the minds of many advisers, environmental, social and governance factors as well as sustainability are additional challenges to add to the list.
Indeed, there are challenges, but these are outweighed by the opportunities.
And there is also the simple truth that regulation is likely to push investment advice to incorporate sustainability considerations and disclosures.
The good news is that responding to client demand for sustainable investing is a great way to build relationships.
It is not just the next generation of your clients that is interested in sustainability – Schroders’ recent global investor survey showed that demand is strong across all age ranges. That is unsurprising.
In the face of the threat of serious climate change (and if you have not read the Intergovernmental Panel on Climate Change’s 2018 report, you really should – though I apologise in advance for the sleepless nights it may cause), we all want to feel as though we are doing our bit for people and planet.
But you do not have to give up returns to invest sustainably. In fact, the opposite is true.
- ESG investing has become another factor for advisers to have to think about
- ESG investing has moved further up investors' agenda
- Some basic ground rules around ESG investing are being developed
There is good academic evidence that integrating ESG factors into investment processes improves returns.
Friede, Busch and Bassen’s landmark report (ESG & Corporate Financial Performance: Mapping the Global Landscape) on all of the past studies around this topic indicates that ESG factors correlate with companies’ cost of capital.
High scores for ESG, lower costs of capital, stronger returns.
Their study does also show that it is difficult to capture these returns as alpha, but there is plenty of scope for clients to benefit from the improved market return.
This should not really be a surprise, but there are many advisers who equate sustainable investing with ethical investing – an approach that did tend to lead to lower returns due to the reduction in the size of the investible universe.
Negative screening remains a popular approach, but there are others – such as ESG integration and positive screening, which are growing more rapidly – that do not reduce the universe size.
So, if sustainable investing can offer attractive returns, client demand is trending that way and regulation may require it anyhow – what is holding advisers back?
There seem to be a few mental obstacles for the industry to clear, in particular around language, skills and timing.
Getting the language right
It is important to be clear in the language that you use around responsible and sustainable investment.
First up: ESG integration is a tool. It is not a discrete investment strategy.
There are different investment strategies that rely on ESG integration.