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Ethical investing could become default for advisers

 

Such is the investment case for ethical investing that it could soon become the default for both fund managers and advisers, according to Alan Chan.

The chartered financial planner at IFS Wealth and Pensions was appearing on the FTAdviser Podcast with Ed Smith, the head of asset allocation research at Rathbones, to discuss environmental, social and governance investing.

Mr Smith said it was a myth to say ESG investing produced lower returns, and that often there was a premium associated with it.

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He said: "There are really great studies that suggest there is as much as a 5 per cent annual return premium to be had by investing in companies that rank highly on responsibility metrics and avoiding the ones that rank poorly, and that's after adjusting for other factors. That's a genuine premium."

Mr Smith added his company was integrating ESG investing into its whole process, rather than creating a silo for it.

He said: "The goal that Rathbones is working towards is to integrate ESG into the whole process because there is lots of evidence, it helps us avoid the blow-ups and helps us identify companies with a lower cost of capital and a higher return on capital.

"There are lots of good reasons to incorporate it into your process, even if you don't care about child poverty or polar bears and are simply motivated by investment returns."

When asked whether he thought ESG investing could become a default for advisers in a similar way, Mr Chan said he did.

Mr Chan said: "I think we are starting to see that coming through and it is regulation that is driving that.

"If you look at some of the larger occupational DC pension schemes, so we're talking 100 members or more, the trustees are already having to consider ESG factors when they are selecting their investments or their fund managers so it will be interesting to see how that will filter down to the smaller schemes, the auto-enrolment schemes, and then through to fund level and adviser level.

"I do think that it is the way forward: more ESG considerations with particular funds and it may be in the near future that advisers will start to do that a bit more but at the moment I think it is all fairly new to the industry so it is a bit more 'wait and see'."

But Mr Chan warned that he is still asking his clients whether they prefer ESG investing rather than defaulting them into such funds because of the risks involved.

He said: "From a compliance perspective an ESG fund does carry a little bit of additional risks associated with it so we would want to establish the client's views and their preferences to investing first of all.

"And we would dig a little bit deeper to find out what ethical means to that individual and from there we would recommend a portfolio for them. But at the moment the default approach would be a traditional investment portfolio."