Compliance consultant Tony Catt examines some of the challenges facing advisers looking to incorporate advice on ESG investing into their client discussions.
Every day it seems to me that there are more and more people writing and talking about ESG investment. Perhaps, if there is one good thing to come out of the Covid 19 lockdown, it has been the reduction in our carbon footprint as a result of less travelling to meetings and to our places of work as we work from home and attend meetings on Teams/Zoom or Skype. The counter argument relating to our health and wellbeing is, however, for another day.
Unpicking ESG’s core principles
I am currently in the process of producing a detailed report on ESG investing to provide information for advisers and paraplanners . The aim of the report is to enable them to become more confident about discussing ethical, responsible, sustainable, green or ESG investment or whatever umbrella expression you wish to apply, with clients.
The plethora of descriptions relating to sustainable investing is certainly not conducive to helping advisers make suitable investment choices for their clients. I have met some very experienced and well-respected people who started out in the Socially Responsible Investment (SRI) style in the last century. They have seen the market evolve over the years as their efforts to spread the good word have gained traction. With that experience comes a real depth of knowledge.
t must be a cause for concern for those experts that many advisers are now entering the area with little knowledge and, worryingly, the inability to differentiate effectively between the different types of investment strategy within the ESG Spectrum of capital investment.
Is it suitable?
We need to avoid the pitfalls that occur with a simple “scores on the door” grading system which has often been used for clients’ attitude to risk. You are risk score 5 – equating to medium risk, so we will put recommend you invest into a medium risk score 5 fund. That’s often without ever having really discussed whether taking that level of risk is most likely to enable the clients to achieve their objectives.
What’s really what?
It is important for advisers to know exactly what the client’s beliefs, values and objectives are before they can select and recommend an appropriate fund or provider on the spectrum of capital investment. This is because fund managers are likely to adopt investment strategies as a whole investment culture. If this is marketed in a clear and transparent manner, then there should be no problem.
There is no shame in a fund manager opting for a certain style of investment, although some companies will try to maximise their virtue by purporting to be at the impact end of the spectrum rather than the traditional end.
Where we have a problem is that some fund managers, most likely to be later entries into this market, are labelling their funds as ESG or sustainable without changing their investment mandate. It could be that, amazingly, their fund was already ESG qualifying and that they had been doing that style of investment all along, without realising what it was called. Or alternatively, their claims amount to relying on their underlying investments credentials as they may be considering taking steps into transitioning into sustainable practices in the future. It is an interesting question to consider at what point does the use of transitioning companies, or “best of breed” investment strategies go over the line into “greenwashing”?
The issue of clear governance and transparent information will become more prevalent as time goes on. As will the issue of stewardship, of how fund managers leverage their shareholdings into influencing how companies operate in the future. We are already seeing this happen with Sarasin and Shell as well as other examples. This is likely to be more effective than efforts from Central Governments.
The FCA may also have some influence. It has already introduced the Sustainable Finance Disclosure Regulation for providers and fund managers, which has seen some improvement in the quality of information and clarity regarding their ESG credentials. I believe that it will not be long before this directive filters down to financial advisers and wealth managers. When it does, advisers will be mandated to discuss ESG investments with their clients.
This is where my ESG report will come in. Through it, I am looking to provide sufficient information to help advisers and paraplanners to become confident to speak to clients about this type of investment strategy. It goes beyond simply knowing of the existence of ESG but also unpicks what the jargon surrounding this area really means. Clearly, we need to translate the clients’ beliefs and moral compass into a meaningful investment strategy that will not only chime with those beliefs but enable them to achieve their investment objectives.
ESG in practice
I believe that ESG investment is rather more nuanced than the simple consideration of attitude to risk that some advisers have been, rather poorly in my view, considering over the years. I have seen ESG investment questionnaires that could be counteractive to making any suitable recommendations because a client ticks so many boxes that the questionnaire filters out all the available investment choices.
Personally, I think that ESG investment is easier to speak about with clients because it involves talking about things that are in the news every day. For example, I believe that most people might agree with the principles of the Insulate Britain movement but feel that their methods are not doing their cause any good. But there you have a subject which most people will have seen or perhaps even experienced. You raise the issue and you are straight into your discussion of the merits of ESG investing.
ESG Investing – it’s the future of investment happening in front of your eyes right now. It’s time we equip ourselves properly to ensure we have all the information we need in order to ensure the right outcomes are achieved for clients, advisers’ businesses and for the planet.
Tony Catt, Compliance Consultant TC Compliance Services ( 07899847338 )