ESG or ‘ethical’ seem to be buzz words at the moment, but can we be clear as to what they mean, and, as financial advisers, should we be paying more attention to these?
Are they likely to be a trend that will develop faster than we are equipped for?
ESG means using environmental, social and governance factors to evaluate companies and countries on how far advanced they are with sustainability.
There are ESG portfolios of equities and/or bonds for which ESG factors have been integrated into the investment process.
This means those assets in the fund have passed stringent tests over how sustainable the company or government is regarding its ESG criteria.
They would exclude companies with, for example, poor records on pollution, labor relations or management practices and sovereign bonds of governments with bad records.
According to the Investment Association, as of October last year, ethical funds under management reached £16bn, representing a 1.3 per cent share of industry FUM.
In the month of October alone, net retail inflows reached £91m.
So ethical or ESG funds seem to be gaining in popularity; the media certainly brings our attention to climate change and we physically experience the effects on a regular basis.
Therefore our approach to investing or advising on these funds may mean a change in fact finding.
Obviously, we need to investigate a client’s views closely and how much they are based on their own values and knowledge rather than a fad.
SRI Services offers a questionnaire on its website, asking clients whether they would like to consider ESG or religious issues when looking to invest, so that might be a useful start, as well as incorporating appropriate questions as part of the discovery meeting.
We certainly ask the questions, but I think it now needs to be more in depth.
We then need to be in a position to educate our clients as to what realistically can meet their requirements as well as their financial objectives.
Alternatively, we can ignore the whole issue at our peril, just as some people (no names) deny that climate change exists and will have little effect on our lives and our businesses.
Marlene Outrim is managing director of Uniq Family Wealth