ESG Investing  

Getting ready for upcoming ESG requirements

This article is part of
Guide to client recruitment during the pandemic

Research and information sources

In the meantime, there are a number of practical steps that advisers can take, to make sure that they are fully prepared for the forthcoming ESG requirement.

“Advisers should be considering how they are going to approach this subject with clients”, says Phil Smeaton, chief investment officer at Sanlam UK. 

“It is no longer a peripheral topic and it should become part of ongoing discussions between the adviser and the client. Advisers will need to talk to their clients about ESG and explain what it involves, by giving examples to illustrate the issue. 

"They then need to incorporate their clients’ ESG preferences into any product or service recommendation. 

“In practice this means the first thing advisers need to do is research the ESG approach taken by products and services they are likely to recommend. Their research needs to include ESG as part of the due diligence in understanding the investment process, potential returns and risk profile.

“A great source of information should be the investment managers and fund houses themselves, who should be able to explain the extent that ESG influences their investment decisions and how this is embedded in the investment process. 

“Before asking clients questions, advisers should explain how ESG considerations can affect investments from excluding perceived bad industries, to promoting companies taking positive action to support good companies.

"It is important that clients understand the choices they have available to them. It may be that an off-the-shelf product will satisfy a client’s ESG preferences, but some clients will appreciate a higher level of service and customisation available.

"As with active versus passive, the degree of ESG used is another consideration for investors. As ESG is still fairly embryonic in nature there is little correlation and agreement with what ESG involves, and passive implementations based on scoring systems may be difficult to explain and not produce the portfolio that investors expect.”

Mr Smeaton adds: “Aside from regulatory obligations, the wider topic of what is important to clients is a great way to demonstrate the value of a financial advice service − it is so much more than investing in a product.

“Great financial planners ask questions such as ‘why is money important to you?’ and stay quiet listening to what money means to a client.

"It isn’t always what we expect but it can quickly help the adviser understand their client. ESG is one important aspect in relation to the ‘why’ question and one that advisers should embrace as part of the value a financial-planning service can offer.”