ESG Investing  

How to establish your client's sustainability preferences

  • Describe some of the challenges relating to assessing a client's ESG inclinations
  • Explain how to adapt one's style as an adviser when dealin with sustainability
  • Identify clients' emotional attitude to sustainability
CPD
Approx.30min
How to establish your client's sustainability preferences
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Sustainable investing is on the rise as more and more people pursue investments that manage sustainability risks, align with their personal values and have a positive impact in the world.

Investors are increasingly illustrating that they care about company practices and their impact on the environment and society at large, with evidence from multiple sources indicating that sustainability is of at least moderate importance for 70 per cent to 80 per cent of investors.

From seeking out companies committed to addressing climate change, to prioritising those sourcing ethical supply chains or demonstrating transparency in their reporting, the opportunities to respond to global challenges through investments are boundless. 

There are a number of steps that the adviser can take to accurately understand the client’s sustainability preferences and, therefore, consider investment suitability.

Rather than simply gauging whether the client is pro-sustainability or not, the personal, emotional and social reasons behind these sustainability preferences must be explored. Successful sustainability conversations pivot on a clear understanding of someone’s goals, which can be obtained through a robust and standardised process.

Understanding sustainable and ESG investing 

Sustainable investing is the process of incorporating environmental, social and governance factors into investment decisions. The E examines the effect of a company’s activities on the environment, either directly or indirectly; the S looks at a company’s impact on the society in which it operates; and the G explores its corporate governance and behaviour. Crucially, these ESG factors are an important driver of long-term investment returns from both an opportunity and risk-mitigation perspective. 

As demand for investments that actively consider ESG factors has grown over recent years, so has regulation. And as ESG becomes a major theme in adviser-investor conversations, regulatory pressure continues to build.

It is increasingly being considered a normal part of fiduciary duty to clients to consider ESG factors, and the Financial Conduct Authority has now embedded climate considerations into its remit.

Furthermore, over recent years the European Securities and Markets Authority has consulted on the inclusion of ESG risks and characteristics within the investment advice and management process. And there is the proposed amendment to Mifid II, which states that the client’s sustainability preferences must be incorporated into their suitability assessment and that all ESG-related features of any proposed products must be disclosed.

Understanding both the ESG opportunities and risks presented by investments, and meeting the fast-evolving regulatory requirements, is key to providing accurate financial advice. 

It is crucial for the adviser to understand the client’s sustainability preferences from the outset. Given their aim of optimising returns, many advisers over-emphasise the importance clients place on returns alone, disregarding their personal values.

There are a number of hedonic reasons why investors may opt for sustainable investments or want to begin considering such options.

Therefore, when holding conversations around sustainability, the adviser must aim to understand more about the client’s personal values and beliefs.