How advisers ask clients questions on ESG will be crucial, writes Heather Hopkins, who explains why getting the phrasing right is the first step on the road to sustainable investing with purpose
Historically, most investors have put ESG investing into a bucket, regarding it rather like veganism – a niche that is not for them.
With so much changing in the world (including a wide acceptance of veganism – now rebranded ‘plant-based’ eating) making sustainable investment choices is heading towards being part of the mainstream of investing.
In our interviews with fund managers, gatekeepers and advisers for our latest ESG tracking study, we consistently heard about steady growth in interest in ESG investing. About 12% of advised client assets are being invested in ESG funds or solutions and this has been driven by client demand.
Strong performance of ESG-badged funds during 2020, growing awareness of climate issues and social inequality and subsequent press attention to ESG investing has propelled interest. The next big wave will be driven by regulation.
Half of the 465 advisers we surveyed told us that the profile of clients invested in ESG funds and solutions was similar to their regular clients. Among those that said there was a different profile, most said the difference is age (younger clients) or those with a passion for a particular cause.
Changing the world
For our report, we carried out two consumer focus groups, with people who have more than £250,000 of investable assets. We found that the majority would prefer to do no harm or perhaps do some good with their investments, but not at the risk of a lower return. This was backed up by our adviser research, with advisers saying that 84% of clients see investment return as more important than ESG screening.
Perhaps more optimistically, the consumer groups acknowledged that investing in companies that do good should offer a better return in the long-run.
While rules that were meant to come into effect in March have been pushed back as a result of Brexit, the FCA and Treasury have indicated that regulation that will mandate advisers to have a conversation about ESG investing with clients is likely to come into force soon.
Asking clients about their preferences could open a few cans of worms, so how questions are asked will be crucial. Our research shows that, on average, the topic of ESG, ethical, impact or sustainable investing is raised by advisers in around 17% of client conversations. This is a 7.5 percentage point increase since 2019.
Almost four out of five (78%) advisers say they already include a question about ESG, ethical, impact or sustainable investing in their know your client process. However, our research suggests current practice is more about ethical investing than ESG investing. Asking about Sharia law is unlikely to cut the mustard with the regulator in terms of having a meaningful ESG conversation.
In our focus groups, consumers fixated on environmental or social causes in defining ESG investing: “The choices you make whether you want to invest in, you know, coal plants and cigarette manufacturers versus people that plant and maintain bamboo forests, for example. How ethical or how environmentally friendly, you want to be with your investments.” – Consumer Focus Group Attendee
“Investing in a responsible way, rather than investing in things that might not be, like tobacco and perhaps some sort of pharmaceutical companies.” – Consumer Focus Group Attendee
Preparation is essential
Clearly, advisers need to tread carefully so as not to get bogged down in conversations about, for example, animal welfare, that can lead to bespoke propositions. Advisers need repeatable processes. Tailoring portfolios to meet individual client needs is part of what advisers do but translating portfolios to meet client values on an on-going basis is complex. It is also not necessary for most clients who will be happy with an ESG integrated – or do not harm – portfolio.
In our report, Gavin Francis of Worthstone suggests the following question: “What are you trying to achieve with your wealth?” He suggests that the adviser should then explain the firm’s approach and ask how that maps to the client’s own views.
We think the IA Responsible Investing Framework and the Spectrum of Capital are both good tools to support this conversation.
Getting prepared before regulation dictates you have to do it will undoubtedly result in better client conversations, with more predictable and manageable outcomes for all parties.
Heather Hopkins is managing director at NextWealth