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.
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 Darren Cooke, Red Circle Financial PlanningHe 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.
"The client who you mention it to and says they absolutely want to do it with their 4.5l car sitting on the drive while you discuss their three long-haul holidays this year is the classic case in point: 'But that's OK because my pension is invested ethically so I'm doing my bit aren't I?'
"Personally I am yet to be convinced that ESG investing actually has any real impact. I think the way we consume and the companies we buy from is far more likely to influence a company's culture than who owns the shares. We don't need ESG investing, we need ESG living.”
Barry Strathearn, compliance director at Lowes Financial Management, an advice business, says: “As advisers we have a great opportunity to help clients feel engaged with their investments, and while not every client may in the past have been focused on ethical or sustainable investing, regulatory changes require ESG preferences to be taken into consideration when firms undertake a client assessment.
"At Lowes Financial Management, we also seek to understand if there may be any religious considerations that should be taken into account as well as the client's ESG preferences.
"Over recent years we have seen a shift in attitudes, which have been driven by a variety of factors such as an increasing awareness of climate change and the potential benefits on a company’s performance from having an ethos of strong corporate responsibility. We now also see some investments that produce an ‘Impact Investment Report’ detailing how much carbon is offset per year from the sustainable investment.”
He adds that as an investment professional he is concerned about how some funds may be marketed as sustainable on spurious grounds. Patel says he tends to use funds by providers such as Baillie Gifford and Liontrust, which have an established track record, as a way to avoid greenwashing.
Matthew Connell, director of policy and public affairs for the Personal Finance Society, says: “Financial advisers need to understand their client’s motivation and understanding of ESG to effectively engage in discussions and make suitable recommendations.”
He adds: “For example, does the client want to ensure their investment portfolio reflects the causes they feel passionately about or simply avoid what they consider to be irresponsible companies. Are they an avoider, an amplifier or both but in different areas? If so, in what areas?
“Financial advisers need to be able to understand the different ESG approaches taken by fund managers in order to be confident they ‘do what it says on the tin’ and greenwashing isn’t happening.”
David Thorpe is special projects editor at FTAdviser
