Five facts financial advisers should know about ESG investing

Avoid guilt trips, take a balanced approach and watch out for “greenwashing”. Here are some useful tips to getting client conversations right around ESG.

Environmental, social and governance (ESG) funds that offer investors the chance to use their savings to make the world a better place are in high demand this year. Not only do they allow people to invest with a clearer conscience, they have also outperformed many mainstream funds over recent years¹ – and this has been catalysed by the Covid-19 pandemic. So, if you are not already discussing ESG investing with clients, it’s quite likely you will be soon.

Here are some useful facts about ESG funds to help you support clients keen to talk about this type of investing.

1. ESG doesn’t mean the same thing to everyone

While one ESG investor may be eager to support companies that are engaged in sustainable activities, such as clean energy production, another’s focus might be more on not using their money to promote vices such as smoking and gambling. “Some people only want to invest in companies that have an excellent ESG score, or operate in sectors that fit with their values,” said Francis Gill, founder of adviser Humboldt Financial. “It depends on how important ESG is to them.”

So, whatever an adviser’s opinion of ESG investing, it’s vital that the portfolio created for a client represents his or her views. “It’s important not to try to be too clever,” said Julian Strauss, senior financial planner at Bigmore Associates. “The key is to understand what is important to the client. The investments you recommend should reflect this. “And there should never be any guilt involved should a client not be interested in ESG.”

2. Most ESG investors focus on environmental issues and it’s not all about personal values

While every investor is different, figures suggest that most of those interested in ESG investing do so due to environmental concerns. According to Statista, almost 90% of ESG investors focus on the environmental aspect of ESG, compared to 52% who focus on social factors and 60% who focus on governance².
When looking at an ESG investor’s portfolio, advisers may therefore also need to consider what impact their other investments have on the environment. “People are definitely interested in newer, emerging types of investments, other than ESG, but only if they can do so without causing harm,” said Gill.

That said, ESG investing shouldn’t be just presented as a moral choice, according to Therese Niklasson, Global Head of Sustainability at Ninety One. “We think that by pursuing a ‘sustainability with substance’ investment approach, there are unprecedented opportunities to tap into new sources of growth and potential return – driven by global efforts to tackle our collective sustainability challenges – as well as to manage the investment risks arising from climate change and other ESG-related factors.”

3. Shareholder voting rights can be a powerful ESG tool

There are several ways of integrating sustainability into an investment process. One of the most common ways is integrating ESG consideration in the way securities are screened - for example, investing in companies with good ESG credentials. Another popular way is through a process called ‘stewardship’, which involves an asset manager expressing their shareholder voting rights to improve the sustainability profile of companies in a wider range of sectors. “Large fund managers can potentially use their shareholder voting rights to great effect,” explained Strauss.

However, the investment strategy of funds which integrate an ESG focus into their process is not always clear-cut, which is why advisers may need to drill down into how funds are run to ensure those they recommend truly fit their clients’ objectives, added Strauss.

4. ‘Greenwashing’ is a common concern

‘Greenwashing’, or taking steps to make your activities appear more sustainable than they actually are, is an unfortunate side effect of the growing popularity of ESG investing.

For many ESG investors, it’s therefore a major concern, with 44% concerned that ESG investments are not what they claim to be, according to recent research from Quilter³. Strauss’ view is that the best way to reassure clients in this regard is to walk the walk – as well as talking the talk. “Ideally ESG should not just be a tick box exercise, or something an adviser recommends,” he said. “It should also be reflected in the adviser’s own working practices.”

With Quilter’s figures also showing that 56% of investors expect to become more involved with ESG funds in the future, it’s an approach that could well stand you and your firm in good stead for the years to come.

5. Many investors think ESG investments are lower risk

The majority of investors believe that including ESG investments in their portfolios can help to mitigate risk, according to a 2020 Statista survey⁴. In fact, the potential for ESG investments to improve returns and/or reduce risk was the most commonly stated reason for putting money into the sector last year⁵.

However, while they do reduce ESG risks, these types of investments still carry traditional risk exposures related to market volatility. And while ESG investments have done well during the Covid-19 pandemic, there is a danger that the current buzz around them could encourage investors to plough money into funds that do not fit their risk profile.

And for ill-informed or over-enthusiastic advisers, that’s a potential mis-selling scandal in the offing. “Especially if investors start being advised to put their money into narrow, high-risk funds that have strong ESG credentials but are not in line with their risk profile,” Strauss said. “That’s why it’s important to take a balanced approach.”
 



Sources:
1. S&P Global April 2021: https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/esg-funds-beat-out-s-p-500-in-1st-year-of-covid-19-how-1-fund-shot-to-the-top-63224550
2. Main ESG focus among sustainable investors worldwide 2020, Statista, 2021: https://www.statista.com/statistics/1199652/main-esg-focus-sustainable-investors-worldwide/
3. Greenwashing tops investors’ concerns around ESG, Quilter, 2021: https://www.investmentweek.co.uk/news/4031729/greenwashing-tops-investors-concerns-esg
4. Share of investors who think ESG factors can help mitigate risk 2020, Statista, 2021: https://www.statista.com/statistics/1197107/share-of-investors-who-think-esg-factors-can-help-mitigate-risk/
5. Reasons to consider ESG factors among investors worldwide 2019-2020, Statista, 2021: https://www.statista.com/statistics/1199515/reasons-consider-esg-factors-investors-worldwide/