Defining responsible investment remains a challenge

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.”

The tools for the job 

When it comes to selecting the right responsible investments, there is a wide range of tools and information sources that advisers can use, says Glassey. “ESG data sets are proliferating rapidly, and it is estimated that there are 600 different rating systems globally.”

Advisers therefore have their preferences and different approaches. 

Kate Capocci, associate director and responsible investment lead at Smith and Williamson, says: “We do a lot of research in house to understand preferences and we have a proprietary, in-house process, where we look at managers and their philosophy, team, processes and how they use responsible investment factors. We also use MSCI ESG Manager as a tool.”  

The tools on offer can vary and have their limitations, however, as Paris Jordan, multi-asset analyst at Waverton Investment Management, observes: “Different tools have different aims, so how good they are is dependent on what information an adviser is seeking.”  

And the lack of standardisation and consistency can potentially be a headache for advisers when it comes to sifting through and comparing responsible investment information and data.

Eric Bigelsen, senior adviser and head of the ESG Work Group at the EDM Council, says: “Standardisation and consistency are significant challenges today. Even carbon, one of the most well-known and understood ESG factors, is awash with confusion due to inconsistent definitions and calculations that exist across multiple jurisdictions.” 

Lorraine Waters, chief data officer at data management company Solidatus, also highlights issues with inconsistency: “One of the most challenging things with ESG today is the lack of a universal scoring system. Many firms have enacted their own, but since there is no widely adopted system, it becomes very challenging for firms that are developing investment strategies as well as those looking to invest in green-savvy companies.”

The lack of standardisation and inconsistency is a widespread challenge, as Capocci acknowledges: “How best to report on ESG performance is a really difficult area for the industry as a whole, as the external data can be a bit patchy and sometimes doesn’t fully reflect what we believe, but it is useful as guidance. This is an area where we would like to see improvement.”

Tomaszewski also expresses concerns: “All the tools are useful in their own way, but until the assessment of and research into funds from a responsible point of view is up to the standard of regular fund research then investors will have a greater chance of investing into products that don’t align with their views.”

But unfortunately the solution is not quite here yet, as Bigelsen estimates: “We’re probably a few years away from having better, more complete and consistent data that all stakeholders in the ESG ecosystem can rely on.”  

Fiona Nicolson is acting deputy features editor of FTAdviser