“What’s wrong with a fag and a drink?”
That was the first question I once had from a client about the environmental, social and governance recommendations I had proposed for the portfolio.
An entirely reasonable question, I thought.
It goes straight to the part that 'know your customer' rules play in ESG-oriented advice.
Having listened to, and gently probed the client’s views in previous conversations as part of the KYC process, I was reassured that the recommendations seemed suitable.
The client was simply engaging with the recommendations, and his question led to an enjoyable and thoughtful conversation.
All the investment recommendations were accepted, and they proved to be rather profitable for the client: the ideal of making money, and doing good.
They have rewarded their clients rather well over the years.Is ESG a niche interest? No, it is a multi-trillion dollar part of the listed investment universe.
In Europe, more investors have assets that have been ESG screened than not. Every asset class is available, and there is plenty of choice in sub-asset classes too, with both growth and value orientations.
There are more than 100 actively managed funds provided by UK fund managers, and an increasing range of passive funds too.
It would be rare for large workplace pension schemes to have no ESG options, so clients may be interested in your view on those funds too.
But what about 'greenwash'? Yes, it’s definitely out there, especially in the newer funds. But there are plenty of ESG funds with good criteria and strong performance.
Some of the actively managed funds have been going for a decade or several more, so have a strong track record.
In practical terms, this means that they invested early and very profitably in wind turbines, solar energy, electric cars, and pollution management and so forth.
Forward-looking, modern and motivated investors, they have rewarded their clients rather well over the years.
ESG investment 101: how does it work? There are three basic approaches: screening, engagement and positive investing.
Screening for example, would be excluding sectors such as the arms industry. This is likely to be very profitable, and not just because of the continuing war against Ukraine in Europe, but over the longer term too, in other parts of the world.
So it is worth asking a client directly: would you like to profit from wars?
Their response could be a helpful guide as to where, and how deeply they would like you to embed their values in your investment recommendations.
It will also illustrate that choices have to be made, if the instruction is 'just maximise the return'. Most clients would prefer that returns are high from the expansion of renewable energy than from bloodshed.
It is worth asking a client directly: would you like to profit from wars?The “engagement” approach prompts another question: would you prefer a fund manager to actively hold its investees to account and push for change, on say carbon emissions, health and safety standards and environmental pollution; or would you prefer companies to be excluded, and give up on that investor power?
That investor power has been proven to get results, from even the largest global fossil fuel producers and polluters, but not always. So again, the client has a choice to make, and their view will be a helpful guide for your investment recommendations.
Lastly, 'positive investing'. This is perhaps the easiest to explain to clients: would you like to focus only on sectors that clearly boost sustainability in the economy, such as solar panels, electric cars, etc?
Most long-standing actively managed ESG funds have some blend of screening, engagement and positive investing, but there are newer funds that focus on only one of these approaches.
In short, one possible answer to the entirely reasonable question of “What’s wrong with a fag and a drink?” is “Absolutely nothing, if you enjoy them.
"But investment decisions are another matter. Would you feel at ease enjoying a comfortable retirement, knowing that you’re profiting from lung cancer and cirrhosis of the liver?
"Because there’s an alternative route to that comfortable retirement that leaves the world in a better state for your grandchildren. Shall we have a chat about it?"
Tanya Pein is an IFA at In2 Planning who specialises in sustainable investment
