ESG Investment

15 October 2021

ESG Investment – more column inches for you

Every day, there is somebody writing about ESG Investment. You would have thought, this would not be sustainable when you consider all the trees that are felled to provide paper for reports. Luckily, this article is most likely to published online. So, you will use up some electricity to read this instead.

If there is one good thing to come out of the Covid 19 lockdown, it is the reduction in our carbon footprint to go to meetings and to our places of work as we wok from home and attend meetings on Teams/Zoom or Skype. The counter argument relating to our health and well-being is for another day.

If there is one good thing to come out of the Covid 19 lockdown, it is the reduction in our carbon footprint

 

I am in the process of producing a detailed report to provide information for advisers to enable them to become more confident about discussing ethical, responsible, sustainable, green or ESG investment or whatever umbrella expression you wish to apply.

I am in the process of producing a detailed report to provide information for advisers to enable them to become more confident about discussing ethical, responsible, sustainable, green or ESG investment or whatever umbrella expression you wish to apply.

I have met some very experienced and respected people who started out in the Socially Responsible Investment style in the last century. They have seen the market evolve over the years as their efforts to spread the good word have gained traction. With that experience comes a real depth of knowledge.

It must be a cause for concern for those experts to see this area about to be plundered by some many advisers entering the area with so little knowledge and the inability to differentiate between the different types of investment strategy within the ESG Spectrum of capital investment

I have seen ESG investment questionnaires that could be counteractive to writing business because a client ticks so many boxes, so definitely, that the questionnaire filters out all the available investments.

We need to avoid the pitfalls that occur with a simple “scores on the door” grading system which has often been used for clients’ attitude to risk. You are risk score 5 – medium, we will put you into a medium risk score 5 fund. Without ever having really discussed whether taking that level of risk is most likely to enable the clients to achieve their objectives. 

It is important to know what the clients’ beliefs, values and objectives are before we can select the fund or the provider on the spectrum of capital investment. This is because fund managers are likely to adopt investment strategies as a whole investment culture. If this is marketed in a clear and transparent manner, then there should be no problem.

There is no shame in a fund manager opting for a certain style of investment, although some companies will try to maximise their virtue by purporting to be at the impact end of the spectrum rather than the traditional end.

Where we have a problem is that some fund managers, most likely to be later entries into this market, are labelling their funds as ESG or sustainable without changing their investment mandate. It could be that amazingly their fund was already ESG qualifying and that they had been doing that style of investment all along, without realising what it was called. Or alternatively, their claims amount to their underlying investments may be considering taking steps into transitioning into sustainable practices in the future. It is an interesting question to consider at what point does the use of transitioning companies, or “best of breed” investment strategies go over the line into “greenwashing”?  

There is no shame in a fund manager opting for a certain style of investment, although some companies will try to maximise their virtue by purporting to be at the impact end of the spectrum rather than the traditional end.

The issue of clear governance and transparent information will become more prevalent as time goes on. The issue of stewardship, of how fund managers leverage their shareholdings into influencing how companies operate in the future. We are already seeing this happen with Sarasin and Shell. This is likely to be more effective than efforts from Central Governments.

The FCA may also have some influence. It has already introduced the Sustainable Finance Disclosure Regulation for providers and fund managers, which has seen some improvement in the quality of information and clarity regarding their ESG credentials.  I believe that it will not be long before this directive filters down to financial advisers and wealth managers. Then advisers will be mandated to discuss ESG investments with their clients.

This is where my ESG report will come in. I am looking to provide sufficient information for advisers to become confident to speak to clients about this type of investment strategy.  It is not just about knowing about the existence of ESG but also what the jargon surrounding this area means. We also need to translate the clients’ beliefs and moral compass into a meaningful investment strategy that will not only chime with those beliefs but enable them to achieve their investment objectives.

I believe that ESG investment is rather more nuanced than the simple consideration of attitude to risk that advisers have been so poorly considering over the years. I have seen EDG investment questionnaires that could be counteractive to writing business because a client ticks so many boxes, so definitely, that the questionnaire filters out all the available investments.

Personally, I think that ESG investment is easier to speak about with clients because it is talking about things that are in the news every day. I believe that most people agree with the principles of the Insulate Britain movement but feel that their methods are not doing their cause any good. But there you have a subject which most people will have seen or perhaps even experienced. You raise the issue and you are straight into your discussion of the merits of ESG investing.  

ESG Investing – the future of investment happening in front of your eyes right now.

ESG Investing – the future of investment happening in front of your eyes right now.