ESG preferences are not suddenly going to take precedence over other suitability criteria but it is another layer that will need taking into consideration.
It is therefore worthwhile to take some steps now and consider how to embed ESG preferences within your client fact finds and annual reviews. This could put you one step ahead of the field.
Questions to ask your asset managers
Responsible investment has grown over 40 per cent since 2014 and is quickly establishing itself as the ‘norm’.
There has been a growing prominence of ESG considerations within the institutional market for a good number of years and this is now starting to flow into the retail market.
In January 2020 alone, responsible investment funds saw record net retail sales of £526m in January.
This is largely being driven by a combination of regulatory change and societal shifts such as the mass rejection of single use plastic and peer-to-peer fashion trading, to name a few.
An increasing number of asset managers have announced their intention to take ESG factors into account within their investment process.
This increased focus provides a good opportunity for advisers to understand more about the different responsible investment approaches, and to review due diligence procedures in advance of the regulations coming into force.
My advice would be to leverage as much information as you can from the asset managers you use on their policies in relation to responsible investment.
Some questions to ask
These are only examples, but collectively they dig into a firm’s policy and strategy in relation to responsible investment and help you evidence to clients that these are embedded into investment processes, portfolio management, and governance.
They are also questions that Royal London, as an asset owner, asks the asset managers that look after our customers’ money as part of our due diligence process.
Here is a checklist of potential themes and areas to focus on:
- Have you signed up to the Principles for Responsible Investment (PRI), and if so, can I see a copy of your most recent assessment report?
- Have you signed up to the UK Stewardship Code 2020? Are you a member of any other ESG related organisations?
- Do you have any policies that outline how to incorporate Environmental, Social and Governance (ESG) issues into the investment decision making process? How do you monitor and evaluate compliance with the policy?
- Do you have any voting and exclusion policies? Do you publish details of your voting track record? If it’s not available, why is this?
- Do you have an engagement policy? What issues do you typically engage on, and can you provide examples?
- What ESG data or research do you currently use? Do you have a specialist in-house team, or is it brought in by a specialist third party?
Focusing on these areas can help direct your research and as you start to integrate a responsible investment lens into your service and proposition, the next stage to consider is how to embed ESG considerations within your client fact finds and annual reviews.
Questions to consider including in your client fact finds and annual reviews
You may have been providing financial advice for two, three or maybe even four decades, and you may never have been asked any questions at all by your clients in relation to responsible investment and/or ESG factors.
However, this could all well change over the next couple of years due to the regulatory changes and societal shifts which have already been discussed.