Even before the pandemic ESG was becoming a mega-trend for clients around the world, but Covid-19 accelerated it up investors’ agendas.
According to Laith Khalaf, head of investment analysis at AJ Bell, advisers are likely to come across customers who fall into three different camps:
- Those who are not concerned about ESG considerations;
- Those who are concerned but do not have any firm ideas about what this means for their investments; and
- Those who have definitive ideas about how they want their own ethical preferences to be reflected in their portfolios.
Khalaf adds: “Advisers can triage their clients to find out which of these groups they sit in, and provide suitable recommendations accordingly, while also explaining any limitations in terms of the investment products meeting the ESG preferences of customers, particularly those with very clearly defined views.
“Ultimately pure ESG investors cannot gain quite the same absolute level of diversification as unconstrained investors, but they can still achieve an appropriately high level of diversification which doesn’t expose them to too much stock or sector risk.”
Mollie Thornton, a senior investment manager at Parmenion, says while ESG investors do face additional constraints – generally avoiding investments in companies involved in weapons, tobacco and human rights abuses or excluding companies involved in areas such as fossil fuels, gambling, animal testing and alcohol production – there are increasing investment opportunities in companies exposed to ESG themes such as renewable energy, waste and recycling, water, electric vehicles and plant-based meat.
She adds: "At a fund level we find there is a huge range of equity and bond funds available with different ESG and sustainable mandates, so we have plenty of choice to find leading funds with the highest ESG standards. We do find there are fewer ESG funds available in alternatives asset classes, such as infrastructure and absolute return, although this is increasing."
Claude Brown, partner at Reed Smith, says: “In some senses, ESG investors cannot gain the same level of diversification as unconstrained investors as there are certain investments which would never pass muster in an ESG investment portfolio. However, that has to be balanced against the risk of investing in non-ESG assets and the rewards from investing in ESG ones.”
If the investment advice process is broken down, it essentially consists of three parts: assessing the client, selecting the right investment based on that assessment, then reporting on the investment on an on-going basis, typically at a client review meeting.
The advice journey itself does not change as the component parts are still the same. However, advisers need to factor their clients’ preferences in these areas.
Asking the right questions
Quilter Investors investment specialist Andy Miller says the company has run surveys with advisers who have told the business they are asking clients about their ESG preferences, however the main question that is often asked needs to be tweaked.
For example a question like, 'Do you have any ethical views that may influence your investment selection?' is too vague to drill down as everyone has some kind of ethics.