ESG InvestingSep 9 2021

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
  • 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
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How to establish your client's sustainability preferences
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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. 

1. Psychological distance: People are more likely to take greater risks regarding decisions that have an impact in the future. An individual may acknowledge the importance of sustainable investing, but when considering that the benefits may largely be felt by future generations, this can impact their decision in the short term (Apostolakis, 2018).

If we consider the example of climate change, acting now may feel unattractive given that the promise of reward appears distant and uncertain (Spence et al, 2012). A measure of psychological distance explores how the investor perceives the impact of sustainable investing on the present and future.  

2. Personal values: It can be assumed that the client’s sole desire is to maximise their wealth. However, they can also be motivated to facilitate social change and may therefore be willing to accept lower returns.

It is important to understand views on controversial and unsustainable areas and whether investments should allow the investor to express their values and beliefs – commonly referred to as expressive benefits – to others through the companies they invest in (Statman, 2010). 

3. Emotional benefit: ​​It is important to measure the emotional benefits of investing. People can benefit emotionally when they believe they have acted responsibly through their investments and can feel compensated by this when accepting that they may receive lower returns.

People who are positive can be more risk seeking (Breaban & Noussair, 2018; Brooks et al, 2020; Brooks & Williams, 2020), while evoking positive emotions around the impact of sustainable investments can influence investor decisions (Vanwalleghem & Mirowska, 2020). It is therefore important to understand the client’s positive or negative emotions towards how companies manage their ESG risks. 

4. Positive impact: We know a proportion of investors express a desire to do good with their investments. This extends beyond a company simply monitoring or managing their ESG risks.

Such investors may be prepared to accept lower returns in order to achieve the social and environmental impacts they seek (Hebb, 2013), whether solely for their investments to have a positive social and environmental impact, or to have a greater impact on how all investments are conducted (Bugg-Levine & Emerson, 2011). It is therefore necessary to identify those investors who seek to generate positive, measurable social and environmental impact alongside financial return.

5. Financial considerations: Although investors may display preferences for sustainable investing, there are trade-offs that they should be aware of, so it is important to understand how investors prioritise their investment opportunities and financial returns in relation to sustainability preferences.

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