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As an IFA who has been advising on sustainable investment for more than 25 years, the explosion of environmental, social and governance funds, initiatives, and articles over the past couple years has been fascinating to watch.
The interest in the topic cannot be ignored and, if you are not talking to your clients about it, inevitably someone else will. As a consequence of all the noise however, ESG fatigue is setting in amongst many in the advice community.
Like parents dreading the 'where do babies come from' conversation, initiating the ESG conversation with clients is proving to be sufficiently awkward that it is being deferred.
Unfortunately, as if existing guidance is not sufficient reason to press on, Financial Conduct Authority labels are looming, and mandating the inclusion of ESG discussions surely cannot be far behind.
If you are new to the subject, the opportunities to confuse both yourself and your clients are myriad.
Add to that the requirements under the consumer duty, and dare I suggest that it is time to have that chat?
So, the questions are: how to do it, how to record it, and what solutions to use. This is very much an ESG/sustainable investing 101 article, with the intention of helping advisers to take their first steps into this world.
Initiating conversation
Asking clients or potential clients if they mind where their money is invested will not result in a negative outcome.
Some will be fascinated and pleased that the subject has been raised, others will find it entertaining or possibly even ridiculous. Neither outcome is detrimental to the relationship.
If you are accepting new clients it makes sense to begin discussing the subject with them rather than with existing clients.
Tips for advising on ESG
Obstacles | Solutions |
Being nervous about a new topic that has not previously been part of your client meetings. | Ask: 'Do you mind where your money is invested?' or 'are there industries you wish to avoid?'. Give examples: arms, tobacco, fossil fuels, etc. |
Projecting personal beliefs and scepticism about sustainable investment. | Show interest – personal beliefs may be equally or more important than financial considerations. |
Trying to create a bespoke offering, requiring full investigation of client values via an in-depth questionnaire. | Use a sustainable MPS as your starting point, and progress to bespoke solutions as your confidence in the subject grows. |
Being intimidated by clients that know more than you about this area. | Realise that enjoying Springwatch and Blue Planet gives you a common interest. |
Uncritical acceptance of the marketing literature. | Dig deep to understand what greenwash means to your clients, and find an asset manager you can trust to properly address it. |
Delay. | Regulation of ESG investing, labelling and so on is on the FCA’s radar – get ahead of the inevitable legislation. |
New clients will not ask the potentially awkward 'why haven’t we discussed this previously?' question. Furthermore, damaging existing relationships is more impactful than losing potential new clients.
I would not recommend asking 'how do you feel about ESG' or something similarly jargon heavy. An easier way to start the conversation would be: 'Have you ever wondered where your money is invested?' or 'do your mind where your money is invested?'.
As part of your conversation with a client, this feels like a natural and logical inclusion.
When it comes to existing clients, address the subject at review stage. There are lots of ways that you can make it possible to have the conversation without it looking like you did not really care to find out.
Not having the conversation could be detrimental.
Start by saying 'this is something that we're now looking at', 'it's a new initiative', or 'it’s something that we've been monitoring'.
Not having the conversation could be detrimental. To suddenly discover that someone you have been dealing with has not bothered to find out that you are actually serious about the environment is going to be quite a tricky conversation.
Having and recording this conversation covers the compliance issue – by asking, you avoid the risk of comeback if they have the sustainable investment conversation elsewhere.
If you are new to the subject, the opportunities to confuse both yourself and your clients are myriad (ethical/impact/positive tilt/avoidance/ESG/SDG anyone?).
Model portfolio service
If I were dipping a toe into this market I would find a sustainable MPS provider and use that as my go-to offering.
We use LGT, but there are a number of excellent alternatives, and it is possible that your current MPS provider (should you use one) either has, or is planning, a sustainable option.
We are currently working on an assessment tool for sustainable MPS, which will be available shortly to all IFAs, free of charge.
We chose our provider following extensive due diligence. They offer everything we require, plus an excellent manager in Phoebe Stone, who combines investment knowledge with great passion for the subject.
ESG advice: Step by step
1. Approach ESG by asking your client an open question such as 'have you ever wondered where your money is invested?' or 'do your mind where your money is invested?'.
2. Make sure you record the conversation.
3. If your are new to ESG consider finding a sustainable MPS provider and use that as your go-to offering.
4. Be prepared to ask the manager how they address greenwashing concerns and to answer the question when it is posed by a client.
5. Having chosen a sustainable MPS provider, understand how they make their sustainability decisions, the assets into which they invest, and then gather information and stories about those funds.
6. Be ready for the inevitable 'how much will I lose if I do this/what will it cost?' question.
A vital part of their sustainable MPS approach is a range of avoidance policies; certain activities are incompatible with a sustainable mandate, and our clients expect such areas to be avoided.
However, this is not a feature of all MPS with a 'positive ESG approach'. I recently reviewed an MPS making such claims with no negative exclusions at all – holdings included a huge arms manufacturer, tobacco firms and coal miners.
However you may feel about such issues, clients with a sustainable mandate expect such areas to be avoided.
An MPS with avoidance criteria should at least reduce accusations of greenwashing, but be prepared to both ask the manager how they address this issue and to answer the question when it is posed by a client.
Be ready for the inevitable 'how much will I lose if I do this/what will it cost?' question.
Having chosen a sustainable MPS provider, understand how they make their sustainability decisions, the assets into which they invest, and then gather information and stories about those funds.
Clients with a sustainability bent like to know where their money is invested and the positive environmental, social and sustainability impact that it is having.
Remember that it does not need to be an all-or-nothing approach, but starting with some exposure to this market is worthy of consideration and assuredly better than avoiding it altogether.
And finally, be ready for the inevitable 'how much will I lose if I do this/what will it cost?' question.
While 2022 has not been the year of the ESG/sustainable portfolio, it would be a brave person who would suggest that the future lies in unsustainable industries.
Mike Head is a director at advice firm Ethical Investors and managing director of research firm Ethical Screening
