Expert: Jess Foulds, Global Responsible Investment Senior Manager Facilitator: Richard Parkin, Founder, Richard Parkin Consulting
Headlines:
- There is a risk that, among all the chatter on ESG, we lose sight of the importance of addressing the reality of climate change
- Although rules are not yet crystal clear, there are regulatory and business risks with not engaging clients about sustainable investing
- Separating the financial case for sustainable investing from the moral case may help advisers determine their role in promoting sustainable investment
- Adviser attitudes to sustainable investing will be hugely important in how the concept develops
Discussion points:
What’s this all for? There is a risk that, among all the chatter on ESG, we lose sight of the importance of addressing the reality of climate change.
There seems little doubt that climate change will have a significant, negative impact on our futures unless action is taken to address it. Aviva reminded the audience of some of the predictions as to how quickly our world is set to change if action is not taken. Rising sea levels, extreme temperatures and weather events, and increasing acidity of our oceans will all have a profound effect on how we live in just a few decades time.
Amidst all the noise around ESG in our industry, there is a risk that we forget what the aim of investing sustainably is. There was no challenge from our audience on the seriousness of the situation, but there seems no consensus yet on the role advisers have in encouraging sustainable investment.
Can we rely on clients to drive the decision?
Although rules are not yet crystal clear, there are clear regulatory and business risks with not engaging clients about sustainable investing.
In its recent consultation on fund labelling, the FCA made explicit reference to advisers being responsible for incorporating sustainability into their advice:
- Financial advisers should take sustainability matters into account in their investment advice and understand investors’ preferences on sustainability to ensure their advice is suitable
Most firms recognised this but felt they would benefit from clearer guidance on the regulator’s expectations of how this was done. However, it seems clear that advisers must at least ask clients about their views on sustainability and so cannot just rely on clients to raise the issue.
Most agreed that clients don’t really understand the concept of sustainable investing and that, where it was being raised, it was often being driven by the client’s children rather than coming from the client themselves. It seems there is at least a responsibility for advisers to help clients get a better understanding of the concepts, even if they choose not to guide clients towards sustainable investing.
Some attendees felt that asking clients about sustainability just put further “grit in the machine” of getting to a suitable recommendation and was unhelpful commercially. However, others identified a potential business risk of not exploring the subject fully with clients if sustainable investments go on to outperform and/or become the accepted approach to investment. Others highlighted the risk of having different advisers in a firm taking a different approach. One firm has two planners of which one almost always recommends sustainable investment solutions while the other rarely does. On the assumption that the underlying clients were broadly similar, this inconsistency in outcome highlights a potential regulatory and business risk and underlines the need to have a consistent approach.
Is it the adviser’s role to promote sustainable investing?
Separating the financial case for sustainable investing from the moral case may help advisers determine their role in promoting sustainable investment.
It quickly became clear that there was a reluctance amongst most advisers to be seen as promoting sustainable investment to their clients. Digging into this we distinguished the financial case for sustainable investment – that investing sustainably would reduce risk and/or enhance returns – from the moral case – that investing sustainably will make the world a better place. Most were clear that the moral case was one for their clients to decide on, while there were varying views on whether advisers should promote the potential financial benefits of sustainable investing.
Of course, there is a blurring of the cases here. At what point does sensible risk management cross the line into making morality-driven choices? Perhaps by being very clear on where that line lies, firms can better determine how far they go in proactively recommending sustainable investing.
Asset managers seem to be moving inexorably towards sustainable investing as the new normal. It may also be worth advisers considering whether sustainable investing should be their standard approach. As one adviser put it, “If I do not want to invest sustainably and ethically am I saying I want to invest unsustainably and unethically?”
What difference can advisers make?
The UK government has clearly committed to making the UK a global centre of excellence for sustainable development. Here and globally, firms are coming under increasing pressure to demonstrate that they are managing their businesses sustainably and may incentivise firms to do so. However, governments are ultimately not responsible for the allocation of capital. Our regulator is focused on ensuring that clients are correctly advised and not misled but is also not going to direct capital.
Key Takeaways:
- Adviser attitudes to sustainable investing will be hugely important in how the concept develops
- Ultimately, it is investors who determine how capital is allocated and so the extent to which their capital supports a move towards a more sustainable future
- Advisers effectively control a significant proportion of this capital and so their approach to sustainability will be a key determinant in how quickly and effectively sustainable investing grows
- Even where firms are not comfortable proactively promoting sustainable investing, providing clients with a full and balanced explanation of what it involves will be hugely important.
