According to network Principles for Responsible Investment, the definition of responsible investment is a “strategy and practice to incorporate environmental, social and governance factors in investment decisions, and active ownership”.
But this is not always as straightforward as it might sound for advisers and their clients. Close Brothers’ 2021 responsible investment survey reported that a massive 82 per cent of investors are not confident that they fully understand the term ‘SRI' (socially responsible investment).
For clients to make the right responsible investment choices, they need to be clear about what responsible investment involves.
Duncan Glassey, managing director at WealthFlow, says: “It is important that clients understand exactly what their values-based portfolios will and will not deliver. A mismatch between client understanding and reality risks the trust that sits at the heart of client-adviser relationships.”
He adds: “Investors may believe that they are making a direct impact on issues such as carbon emissions and climate change. The fact is that the true impact that values-based investing can make is more nuanced and complex than many investors might understand.
"There is, however, a wide gap between reflecting one’s values, for example, by not owning shares in oil companies, and making a difference to the problem that drives these values.”
A clear understanding between client and adviser is therefore required from the outset, as Jeannie Boyle, executive director and chartered financial planner at EQ Investors, says: “If someone wants to find out how to invest responsibly, the first step is to find out what responsible, ethical and sustainable mean for them, as it is such a personal and subjective topic.
"We also need to ask what outcome they’re looking for. Is it to ‘clean up’ their portfolio or is it about impact?
“It’s also helpful to think in terms of themes such as the transition to the low-carbon economy and mitigating the effects of climate change, rather than taking clients through a list of ‘controversial’ sectors they might wish to exclude.”
But there is a caveat, as she explains: “It’s important that we manage client expectations. It’s very hard to create a diversified portfolio in which every holding meets the client’s specific criteria, and continues to meet their exact criteria.”
Christian Tomaszewski, financial adviser at Timothy James & Partners, says making clients feel at ease with their responsible investment choices is also a high priority.
“Investors can struggle with the paradox of not living a ‘responsible’ day-to-day life (eg driving a gas-guzzling car) but still wanting to invest responsibly.
“When they are comfortable with the fact that there may always be a tinge of hypocrisy, choosing where on the spectrum they wish to invest is easier. It is essential that clients don’t feel judged on their decisions, but are enabled to choose an investment solution that is in line with exactly what they want and require.”
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