ESG Investing  

Advisers begin excluding specific sectors in ESG client portfolios

Advisers begin excluding specific sectors in ESG client portfolios

Advisers are now beginning to exclude specific sectors for their client portfolios when it comes to environmental, social and governance requirements.

According to data by Defaqto, advisers are now more often wishing to exclude specific sectors, companies, or practices for their client portfolios.

Since the launch of the exclusion filters in March, the use of these filters has increased nearly four-fold, as at the end of October, from 0.82 per cent to 3.08 per cent across all Engage recommendations. 

Chris Deavin, director of analytics at Defaqto, explained that until recently the data suggested that while there was an increasing appetite for ESG in client portfolios, in most cases a sustainable fund meets the requirement without the need for an additional layer of granularity. 

However, he explained that more advisers were now having to be more specific.

“In terms of social exposures, the most frequently excluded are tobacco (19 per cent) and small arms (15 per cent),” he said.

“Whereas for environmental exposures, fossil fuel (19 per cent) and palm oil (14 per cent) are the most frequently excluded. Naturally, the more exclusions applied, the narrower the universe of funds to select from becomes.”

This comes as Defaqto has released a new ESG client preference questionnaire for advisers who wish to better understand their client's preferences.

The firm said its ESG questionnaire is launched through the existing risk profile workflow in Engage.

Once the questionnaire has been completed by a client, the system produces an ESG preference indicator graph, highlighting the types of ESG aligned products which may be suitable. 

An ESG exclusions indicator graph is also produced, showing the adviser the types of investments that the client would like to exclude from their portfolio. 

This information, combined with the questionnaire responses, can then be used to drive the specific filtering and selection of suitable funds.

Pan Andreas, head of insight and consulting at Defaqto, said: “Advisers have been told for some time that they need to embed ESG into their advice processes. However, many could argue that the resources and data to do so successfully, haven’t been readily available. 

“After listening to how advisers want and need to work, we’ve developed an end-to-end ESG solution unlike anything else currently available on the market.”

Andreas added: “We provide advisers with data that can be used to aid conversations to discuss the grey areas and visually show a client where their ESG preferences lie. Ultimately, it allows advisers to have more meaningful conversations around their clients’ ESG requirements and helps them make better informed decisions in their research process.”

sonia.rach@ft.com

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