Responsible investing's future  

How to discuss ESG investing with clients

How to discuss ESG investing with clients

The rise in popularity of sustainable investing among clients has been accompanied by an increased level of regulatory obligation in the same area, leaving advisers pondering how to navigate the environmental, social and governance investing conversation with clients.

With standard definitions of sustainable investing still lacking, and with clients' priorities around ESG being deeply subjective, one of the challenges facing advisers is how to properly match the focus of the client with the range of products available on the wider market.

The Sustainable Finance Disclosure Regulation rules that have recently been introduced and that rank funds by number in accordance with their level of sustainability, may increase the adviser's understanding of whether funds truly do what they say on the tin.

But the advent of greater understanding of the role of particular products does not aid the adviser's conversation with the client, which is the step prior to fund selection.

The challenges posed by the ESG conversation include how to fit it into the suitability framework and how to discuss the personal preferences and views of a client in a way that does not appear judgemental.

Minesh Patel, adviser at EA Financial Solutions in London, takes quite an activist view.

He says: “The role of a professional adviser in any capacity is to highlight relevant trends and themes. And even if those trends or themes are not relevant to a client portfolio today, they will be in future.

"The share prices of some companies will be negatively impacted in future if there are ESG issues. This is not a bolt-on to a portfolio, as some advisers view it, actually it's absolutely central to portfolio construction in the years to come.”

Patel acknowledges the client conversation can sometimes be “difficult”, as many do not regard such issues as a priority for their personal portfolios, but he feels strongly that the topic should be raised anyway. “It may be a challenge for an adviser, but I think it is a challenge that advisers will increasingly have to face, and frankly it is good to be challenged.”

As a London-based adviser he has seen a strong uptick in demand from clients, and that this demand is now coming from across different generations of clients.

He says most of the focus is on environmental issues, with social issues becoming more relevant, and while clients view “governance as almost a given, they expect the fund managers to be doing that anyway”.

Darren Cooke, an adviser at Red Circle Financial Planning in Alfreton has a different view. He says raising the topic with clients can harm the relationship, as many clients feel they are being judged if they have not suggested ESG as one of their priorities. 

Cooke adds: “I think it is incredibly difficult to bring this subject up without it having some influence on the client's responses. Few, if any, want to seem uncaring, even if they really are, so they may well tailor their responses accordingly.