“It just feels like a big risk [for the] adviser to do it for the first time.”
Room for confusion
Declan McAndrew, head of investment research at Foster Denovo, adds that due to regulation running behind the pace of change that has occurred in this area, there is the potential for confusion and this leaves the door open for disparities in understanding and application.
“This may be inadvertent or more deliberate in nature,” he says.
“It’s therefore vital that the first step for advisory firms and asset managers is to define and formalise their interpretation via a company-wide policy and then articulate this to clients in an accessible and constructive manner.”
Steve Kenny, chief distribution officer at Square Mile Research, agreed, saying that as there is currently no regulatory guidance on content or format of material, advisers need to do some groundwork to enable understanding.
“It is important to understand [clients’] preferences, but it needs to be recognised that these may not be apparent to either them or the adviser, and so open questions are key.
“Perhaps you could start with asking them about how they interact with these themes in their daily lives, that is, the importance they place on recycling (circular economy investment theme), or if they have an electric car (energy transition investment theme).”
He says this helps to set the scene and provide more tangible context for what their investments could achieve.
Kenny adds that there might be help soon from the government.
“At present, it is a mishmash of material, however, the impending regulation outlined in the UK government’s recent roadmap, Greening Finance, will help create greater clarity for advisers and their clients,” he says.
McAndrew highlighted that the onus does fall on financial advisers to educate their clients around these issues.
“It’s clear that there is still some level of confusion from investors around the different forms of ESG, sustainable and impact investing.
“However, it’s our role as advisers to educate clients around this – what the terms mean, what options are available, and how these differ.”
He says this means not just how these options differ between themselves, but also how they might be different to traditional non-ESG funds as well.
“Managing client expectations and authenticity of proposition are so important, as is transparency, among other elements.”
However, it is worth remembering that ESG, sustainable and ethical investing can have a positive impact on society.
Appleby says: “Looking past all the different definitions linked to sustainable or ESG investment, which are often used interchangeably, what is really important is that sustainable aspects are analysed and used to help make better investments.
“Investing sustainably should be about making the world a safer, healthier, and more resilient place – as well as seeking strong returns.”