Assessing a client's suitability for multi-asset investments

This article is part of
Guide to building a sustainable multi-asset portfolio

Assessing a client's suitability for multi-asset investments

As typically happens, the rise in client interest in environmental, social and governance (ESG) has been met by a range of new requirements on advisers from regulators. 

Central to those requirements is the new obligation upon advisers to include questions about a clients interest in, and suitability for, ESG investments.

Simon Holmes, portfolio manager, multi-asset solutions at BMO GAM says: "The demand for ESG-related solutions has increased significantly and that’s a trend we see continuing. 

"Several things provide impetus for that shift – regulation is key but there is also greater recognition that investing responsibly makes financial sense as ESG risks can have a material impact on returns. 

"Also, individuals are more aware of the challenges the world faces and are keen to do their bit through investment choices – avoiding investing in polluting companies for example. 

"At BMO, responsible investment sits at the centre of everything we do.  Consideration of ESG risks is integrated into our investment processes and we’re aware that sustainability related megatrends – such as a transition away from fossil fuels - provide some interesting investment opportunities.

"From a multi-asset perspective, it’s important to apply consistent parameters across all asset classes – whether we are investing in equities or fixed income, we operate within the same ‘avoid, invest, improve’ ethos."

But Alex Farlow, head of risk-based solutions at Square Mile Research, says that in reality choosing to ignore ESG, or place less emphasis on it than the market as a whole, is in itself a risk as public sentiment, and the wider regulatory climate changes. 

He says that when assessing the risk profile of a client, a client who is suitable for a higher risk portfolio, is also a client who can have a portfolio which pays less heed to ESG concerns.

Farlow says the key is for advisers to begin to think of ESG risk in the same way they think of liquidity risk or market risk.

Around £66bn of new capital went into ESG funds in 2020, and Farlow says that even many of the funds which do not have an explicit ESG mandate have recently begun to consider ESG risks as part of their investment process. 

He says: “A lot of funds always looked at the governance part of ESG, but now they are also starting to pay attention to the risks that come from environmental and social impacts, there has certainly been a lot of progress in that area.”

Keith Balmer, product specialist, multi-asset team, BMO GAM, agrees that advisers should view ESG considerations as another set of risks in portfolio construction, but added that this also applies to the types of assets invested in.