Firing lineJan 24 2020

Advisers are 'tiptoeing on people's beliefs'

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Advisers are 'tiptoeing on people's beliefs'

January is a special month for Rob Stewart. Not only does this January mark 17 years since he joined Newton Investment Management, but also his son was born the day before he started at the company.

In those 17 years, Mr Stewart, the company’s head of responsible investment research, has seen big changes in the investment sector.

The particular area within his purview is all that comes under the umbrella of environmental, social and governance investing.

We were spending money on this when nobody wanted to talk about ESG analysis Rob Stewart

There was a time in the industry when ESG was wholly treated as an abstract concept, but the tide has been turning. ESG investing is becoming more integrated into investment processes – a trend that Mr Stewart saysNewton was an early adopter of before the City caught on.

“We were spending money on this when nobody wanted to talk about ESG analysis,” he notes.

Political and consumer attitudes towards the environment and company behaviour has been a key driver behind the change.

Mr Stewart says: “What clients want has developed. Our clients have come to us saying, ‘We really love what you are doing with this ESG, but we would like you to take it a bit of a step further’, so that is where our sustainable strategy has come into play.

“We are interested in having portfolios that are dynamic, forward-thinking and are trying to solve some of the problems people are interested in, while also delivering good returns.”

An example of how Newton applies ESG into its process is that when an analyst finds a stock they are interested in, they will speak with Mr Stewart’s team, who will draw up a full ESG report highlighting the risks and opportunities that are material to the fund.

In addition to financial measures, the company evaluates factors such as environmental impacts, social standards and the effectiveness of people in charge.

Mr Stewart adds: “If we decide to own this stock, there are issues we would look to engage this company on, things we would be interested to know more about, so we might talk to the company. We do all of this before we decide to invest.”

Newton does not just want to invest in companies that are already seen as great, but it wants to drive change in companies that have potential, and have areas that need improving.

As change in the ESG arena of the investment sector continues, the biggest driver is sure to be regulation.

The Financial Conduct Authority is consulting on new rules to improve climate-related disclosures by certain issuers and clarifying existing obligations.

The UN’s sustainable development goals also provide an important benchmark for managers of sustainable funds to align themselves with.

There are 17 goals in total that provide a vital reference point for managers looking to identify and monitor ethical credentials.

In the meantime, there is a gap between what investors want and how they can access the funds.

A 2019 survey by the Department for International Development on UK public demand for sustainable investment opportunities found that 68 per cent of UK savers want their investments to consider the impact on people and the planet, alongside financial performance. 

It shows that interest is even higher for millennials, women and people with more than £25,000 in investible assets. 

While this type of investing is important to people, the survey suggests that many people are not investing this way because the industry still needs to:

  • improve the availability and accessibility of products;
  • raise standards and develop common terminology on sustainability and impact;
  • address misconceptions on risk and return, where many people mistakenly think that sustainable investing inherently means that financial returns will be lower; and 
  • share clear and simple information about sustainable investing. 

For advisers, talking to their clients about ESG investing is still a challenge – a discovery Mr Stewart made when he spoke to IFAs at roadshows the company held last year.

“Advisers are close to their clients,” Mr Stewart says. “They are used to having conversations about financial matters and they sort of feel this is a separate issue. I just think it is an uncertainty about stepping into a world which is not theirs to talk about.

“I almost think they feel they are tiptoeing on people’s beliefs.”

He adds: “We are trying to take this on board, as to how can we do a better job of explaining things to advisers, to give them the confidence. 

“We are seeing clients who are interested, and end investors who are interested, but there is this break, which is the lack of understanding.

“So, as an industry we have to do a better job of explaining things and that is part of what we are up to.”

In the next 17 years Mr Stewart says he does not want to be attending conferences where ESG is seen as an add-on to the investment process.

With the pace of change taking place at the moment, that could be happening very soon.

Ima Jackson-Obot is deputy features editor of Financial Adviser and FTAdviser