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 would they feel knowing they have a positive or a negative impact on the environment and society through the companies they invest in?

Would they like asset managers to actively encourage companies to improve their practices? Understanding these psychological and ethical considerations, alongside financial motives, is key. 

Accurately evaluating the client’s sustainability preferences

The key to fully understanding the client’s sustainability preferences is engagement and education.

This allows the adviser to accurately capture their client’s psychological preferences, discuss the implications of their choices and, ultimately, provide tailored advice.

Sustainable investing is not a straightforward tick-box exercise, as preferences can be complex, encompassing a broad range of factors.

However, few advances have been made to create a process that truly helps clients understand the whole picture, while allowing the adviser to accurately measure the client’s attitudes towards sustainability. 

Multiple-choice questions using mock scenarios are one path being explored, allowing the client to select preferred investments after being provided with information about their sustainability and returns.

There are advantages to this approach as it removes a direct line of questioning that can potentially invite a respondent’s biases into the equation.

However, such an approach also has disadvantages. First, hypothetical scenarios are not indicative of decisions made in reality. Second, the investment universe reaches far beyond what can be encompassed by a simple multiple choice task.

Third, it is incorrect to situate ‘sustainability’ at one end of a spectrum and ‘investment returns’ at the other, when sustainable investments can generate greater returns than traditional investments. Fourth, multiple choice questions and mock scenarios demand the client has prior financial and mathematical knowledge, thus this method does not consider the investor’s capability.

Bringing together psychology and statistics in the form of a psychometric questionnaire enables the adviser to cut through the noise and understand how someone might feel and act both in the short and long term.

It is important to use a psychometric questionnaire that captures various views on conventional through to sustainable investing, considering positive impacts and ethical screening.

To understand how clients perceive the benefits of sustainable investing, the adviser can then gain insight into their emotions, perspective, values and desire to do good.

The key to success for a psychometric sustainability questionnaire is to design it with the client in mind, avoid jargon and ensure that no prior financial knowledge is required. Ultimately, this gives the adviser a strong foundation for any discussion and will ensure that the client’s preferences are aligned with their investments. 

Considering the factors that shape sustainability preferences 

There are a number of factors that must be explored to ensure that the adviser is able to help the client fully understand their sustainability-related hopes and expectations.