Initiating the ESG Conversation with your Clients

Background

Three years ago, when the LGT Vestra ESG portfolios were launched, Phoebe used to struggle to get meetings with intermediaries, and there was debate internally about how the portfolios could be effectively managed within the appropriate risk parameters.

The position now is completely different. ESG has become front and centre of intermediaries’ focus, and the ESG portfolios have outperformed.

Phoebe began by providing an overview of the recent developments in relation to ESG. She highlighted the following aspects:

• The SFDR (Sustainable Finance Disclosure Regulation in Europe and the FCA/Treasury looking in respond in a similar fashion in the UK
• The Dear CEO letter on ESG profiling inclusion but little actual progress to date
• The DWS whistleblowing example in Germany where greenwashing had a significant detrimental impact on company share price
• The observation on a recent Langcat survey which highlighted that advisers are experiencing considerable confusion in the terminology used in the ESG space
• Wealth transfer in the next 10 years will no doubt represent a huge change to the investment approach taken on by those inheriting family wealth
• With regard to UN SDGs (Sustainable Development Goals) - it will require $7 trillion to fulfil all of them
• The need to change advisory questioning on ESG to the use of the UN SDGs to frame a conversation and make it personally relevant to the client.

Points Discussed

The following points were raised by the participants and discussed:

• Some participants are struggling to find investment solutions in certain areas (geographical locations/asset classes) for portfolios and as a result a degree of confidence is lost as portfolios may not be able to fulfil their goals
• Others were concerned that client preferences could not be accommodated
• One participant queried whether there was enough research on the impact of portfolios Phoebe outlined LGT Vestra’s use of ISS to research and score our holdings
• There was comment on fossil fuel exclusion and the intricacies of the positive impact and the negative impact of the company’s activities. The conclusion was that it is never black and white but nearly always grey
• One participant said that there is difficulty in educating clients as they tend to see things as black or white. This remains an ongoing issue
• There were questions around Green Inflation, specifically in relation to energy providers, and how this should be assessed
• Discussion then moved to the use of BCorp* as a measure to assess the green credentials of a firm, not just their investment ESG philosophy. One participant mentioned that they held the BCorp and were proud to do so, and another is in the process of applying for BCorp status.* Certified B Corporations are businesses that meet the highest standards of verified social and environmental performance, public transparency, and legal accountability to balance profit and purpose. B Corps are accelerating a global culture shift to redefine success in business and build a more inclusive and sustainable economy
• Conversation moved on to client communication and the frequency and appropriateness. Some participants said that they felt monthly was right and others did it weekly. There were no strong views on what was right or wrong and that there are merits for both approaches
• There followed a conversation on the difficulty (and hence reluctance) to engage on ESG with clients as it was difficult to take the outcomes of the conversations and translate them into appropriate ESG investment solutions. The normal process still applies in that an ATR approach is undertaken and then a solution is applied, but that there was little confidence that the solution met clients’ non-financial objectives
• One participant from Dynamic Planner mentioned that they were launching an assessment capability in their tool to score investment solutions (data from MSCI) at OEIC and MPS level to help advisers. However, it but does not yet address the clear issue of taking a client’s non-financial objectives and translating them into an appropriate investment solution that reflects those preferences. The use of the UN SDGs to frame the client conversation was widely accepted as a good angle to take.

Summary

ESG is now at the forefront of discussion at a number of levels, as are associated aspects such as impact investing, and this is likely to continue to be the case for the foreseeable future. Consequently, financial planners will need to incorporate discussion of ESG into their day-to-day dealings with clients.

To help intermediaries on this journey, LGTV is:

• Launching six educational videos to on ESG details which will be sent to delegates when they are completed, and:

LGTV is happy to provide one to one consultancy services to firms looking to adopt their ESG process.