Sustainable Investing  

How DFMs are incorporating sustainable investing

This article is part of
Guide to Discretionary Fund Management

ESG means taking into account environmental, social and governance factors when analysing an investment. This will not necessarily rule a company out as ESG factors are being considered alongside other metrics.

As the awareness around sustainable investing is growing it has presented challenges to the sector - one of the most contentious, being cost.

Mifid II placed cost very much at the forefront of clients’ minds. Advisers are having to justify what they are doing with the fees they are taking from clients.

Mr Sayers says this is leading to the viewpoint that there should be a passive element that can be based around an ethical strategy.

“But ethical investing by its very nature, due to its check, balances and screening, do not lend themselves very well to a passive opportunity,” he adds.

“Naturally you probably will see some passive elements brought to the table.

"But the question that needs to be asked is; for a passive investment vehicle that is structured sustainable or ethical investing, is it going to be structured to the degree it needs to be, to ensure people are not getting exposure to what they have said they do not want?”

“Because it is predominantly an active element, that cost of paying for active managers is something that has muted the advisers' uptake in this field, given the pressure Mifid II has brought to their business over the past couple of years.”

Charlie Parker managing director of Albemarle Street Partners says being able to demonstrate an ability to add value in sustainable investing is one where advisers can defend their pricing point.

He adds: “There are pricing pressures on DFMs working with IFAs. You need to have really consistent pricing across your client base; both your back book and new business. I think that for me is the thing that needs to come into the sharpest focus."

The other challenge for advisers and in turn their clients is truly understanding what is meant by all the terms that come under the sustainable investment definition.

It does not help that there is a lack of a standardised definition.

In its recent Feedback Statement on Climate Change and Green Finance the FCA said early indications from its diagnostic work on firms’ sustainable product offerings are that the ‘sustainable’ label is applied to a very wide range of products.

The regulator said: “We acknowledge that assessing this is complex.

"There can be legitimate causes for differences in assessments of sustainability of products, for example sectoral or regional differences, and it can be difficult to determine the net impact of a financial product in supporting sustainability goals.