Historically, for many the term “ethical investing” has meant negative screening, excluding stocks that invest in arms, tobacco, alcohol and so on. Now, the term “ESG” (environmental, social and governance) covers a much wider remit, with many funds and propositions offering a new perspective. For example, some funds now invest your assets with a manager who lobbies for positive change and the investment team actively attend AGMs and vote for change.
Whilst some clients may have a reluctance to invest in companies which have bad track records, the question is whether they feel that the ability to have their vote heard may appeal to them more than perhaps their current strategy of shunning these companies (through the negative screening filter). Having the opportunity to positively influence a boardroom could change the client’s mindset.
Many may avoid ethical or ESG investing simply because they associate them with lower returns. A recent study by HSBC, ESG Moves Mainstream, supports this view and found that 48% of investors now cite financial returns as the top driver of their ESG decision-making. One reason this could be the case is that the ethical fund investible universe used to be quite small. However, as the popularity of ethical and ESG propositions grow, particularly among the latest generation to enter the accumulation phase, it appears that investing isn’t necessarily all about the returns, with numerous clients seeking to invest for social and environmental benefit as well as profit, aligning their portfolios with their personal values.
This comes as index constructor and ratings agency MSCI has announced that ESG-metrics have now been integrated into its risk analytics systems. The company said it had made the changes because of rising demand from investors for sustainability data to be weighed-up during the investment process.
Awareness of these funds needs to increase and as Financial Planners, we need to ensure we are always growing our knowledge of investments and are able to offer our clients a solution that fits their needs and values.
Whilst Financial Planners will always ask the client if they have any ethical preferences, more likely than not the client will be the one to bring it up and, typically, they will have specific areas in mind that they wish to avoid investing in.
There are many tools that will help planners to ascertain a client’s ethical preferences; one of these is the ethical screening questionnaire. In my experience, if you give a client an ethical screening questionnaire they are likely to return it wishing to exclude every possible option. Therefore, it’s important to have a discussion with the client to really understand the client’s ethical preferences.
Whilst the popularity of these types of funds is growing, there is still room for improvement. The Schroders Global Investor Study 2018 found that “57% of people indicate a lack of information prevents them from investing or investing more in sustainable investing”. Perhaps those fund managers with ethical offerings need to shout about it a little more, and financial planners need to be more proactive at looking into solutions for our clients.
The discussion around ethical, environmental, social and governance investing is certainly increasing, as I am often reading articles citing an ethical approach, as well as making an effort to talk about it with others in the industry. I do believe that as awareness continues to grow, we will seek more ways to ensure our planet is protected and becomes a better place in which to live for all of us.
Chloe Moran is a Senior Paraplanner at 1825