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Financial Advisers and ESG

Financial advisers need to talk about sustainable investing with their clients as ESG moves into the mainstream

Hortense Bioy, CFA 7 October, 2019 | 11:59AM

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The world today faces unprecedented sustainability challenges: climate change, natural resource scarcity, inequality and populism. Companies face these challenges as well and that means investors need to be thinking about them too. 

More and more investors, asset owners and asset managers are incorporating sustainability into their investment decisions. There is now more than $30 trillion of assets in responsible and sustainable investments globally and we expect this number to continue growing. Sustainable investing has grown significantly over the past decade and is moving into the mainstream.

It is not only professional investors who are interested in sustainable investing; retail investors are interested too. People are changing their behaviour as consumers, turning to more sustainable offerings in every industry and investments are no exception.

A recent investor survey by Allianz found that 75% of respondents across Europe are interested in sustainable investments. Some 83% of UK-based respondents say they are very interested in sustainability in general and 70% say they would invest in funds with sustainability goals.

Despite that, just 20% of investors have discussed the topic with their adviser, and only 26% say they had been offered a sustainable investment after raising the topic with their adviser. So, there is a gap between interest and action.

The Benefits of ESG

This might change very quickly with the new EU regulation that comes into force at the end of 2020 – The EU Action Plan on Sustainable Finance requires advisers to assess the sustainability preferences of their clients. Advisers will have to start documenting how they assess clients’ sustainability preferences, and the UK government has committed to at least matching the ambition of the Plan’s key objectives, regardless of the outcome of Brexit.

There are clear benefits for advisers incorporating sustainability into their practice. Sustainability is certainly an opportunity to attract and retain clients, especially women and the younger generation, where demand is reportedly the greatest. This is particularly relevant in the context of succession, where, according to surveys, 70% of women change adviser after the death of their husband, and 90% of children change adviser after the death of both parents.

And beyond the specific case of successions, talking to clients about sustainability could be a way to connect with them at a deeper level and in some cases, help them feel better about themselves and their investments.

This is particularly important because it is not only women and millennials who are interested in sustainable investments. A survey of 1,000 retail investors in the US found that while women had a slightly stronger preference for sustainable investing than men, the difference was small. The same was true when they compared the sustainability-preference scores of different generations: millennials, generation X, and baby boomers.

That’s clear from the fact we see increased inflows into sustainable funds, which pulled in record net flows in the first six months of the year, closing in on 2018's net flows for the full year. Assets in sustainable funds assets grew 20.5% in the six months to the end of June 2019, compared with an expansion of total European fund assets of less than 8%.

sustainable inflows

How to Talk to Clients

But there are still barriers to broader adoption of sustainable investments, such as the terminology, which many find confusing.

Most of the language – socially-conscious, ethical, green, ESG, SRI and the link – can be used more of less interchangeably though, so when speaking to clients advisers may be best of choosing one term they feel most comfortable with and which they think will resonate best with clients, and being clear about what they mean by it.

Another challenge is the persistent myth that there is a trade-off between ESG and performance. This is something we keep hearing despite the growing body of research showing that there is a positive link between material ESG considerations and company financial performance. It doesn't necessarily mean an ESG strategy will deliver outperformance, because that will depend on the skill of the fund manager, but it isn’t a deterrent to performance either.

Another common myth we hear is that there aren’t enough choices. But there are now more than 2,250 sustainable funds available to European investors, and more than 700 in the UK alone. More than 300 new sustainable funds came to market last year and while equity funds offer the most options, these funds span all key asset classes.

sustainable fund launches

When considering how to implement ESG into portfolios, advisers first need to know where their clients stand on the topic. Some may already be knowledgeable and may know exactly what they want. Others may know nothing about sustainable investing and need advice about whether to take this approach at all. For these clients, advisers may need to spend more time exploring what’s motivating their interests and educating them about the range of possibilities.

Which funds may be suitable for a portfolio depends on the client's preferences and investment needs. To help investors navigate the sustainable funds space, we have grouped them into three general types: ESG focus, impact and sustainable.

ESG focus funds tend to tilt towards companies with higher ESG profiles, while excluding companies with low sustainability profiles and companies in controversial sectors, like tobacco, controversial weapons. Impact funds, meanwhile, aim to deliver positive social or environmental impact alongside financial returns. These are often focused on specific themes, such as low carbon, gender diversity, or green bonds. Many ESG focus and impact funds are diversified strategies that can be useds as substitutes for core portfolio holdings.

Sustainable offerings are focused on activities that participate in the green economy, like renewable energy, environmental services, water infrastructure, and green real estate. Conventional funds can be suitable too as ESG factors are considered into the investment process and teh asset managers  actively engage with portfolio companies to improve business practices.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Hortense Bioy, CFA

Hortense Bioy, CFA  is director of passive funds and sustainability research in Europe for Morningstar

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