Five Ways to Add Value with ESG
Published October 20 by Aviva Investors
It’s no longer enough to deliver clients high rates of return. Now clients want their money to ‘do good’ as well. This quote from a 34 year old experienced investor is typical:
“I buy Fairtrade. I use independent shops not Amazon – my choices are driven by my values so ethical investing was a no brainer once I knew it existed.”
Even if you suspect that your clients might not be interested now, they may well be in the not too distant future. According to ShareAction 68% of younger savers say it's important to use their savings for the good of society, and when asked 84% of savers says they would prefer a pension that uses its investments to encourage responsible business practices.
If you don’t raise the subject another advisor may well jump in ahead of you.
(1)Ask clients about their values
A simple ESG questionnaire can lead to some very interesting conversations. ‘Governance’ may not sound scintillating but when you pull it apart: taxes, executive remuneration, donations, political lobbying, corruption and board diversity are at the heart of some of this year’s juiciest stories:
Some estimates put Amazon’s tax contribution towards the UK economy at a mere 1.2%. Given that most people pay 20% of their salary, it’s a conversation well worth having.
McKinsey’s latest report highlights that organisations with greater gender diversity were 25% more likely to experience above-average profitability than their competitors.
Whilst in the wake of the Black Lives Matter over 40 private and publicly traded companies have joined a pledge to add at least one Black member to their board of directors by 2021.
Even Glassdoor has added new feature that allows users to rate companies on their diversity and inclusion initiatives.
(2)Use everyday language
As Environmental, Social and governance Investing has risen to the top of people’s to do list it stands to reason that they’ll come to you for advice. But according to ESG research conducted by The Big Window you’ll need to act as a translator.
“The language makes you feel really stupid, it’s intimidating and hard to understand. They don’t make it easy.”
Firstly, many investors prefer to talk about it ‘as doing good’ rather than using terms like ‘ethical, sustainable or ESG’. They prefer the phrase ‘how companies are run’ rather than ‘governance’, which can be confusing.
They also prefer that you illustrate your points with real life examples such as the ‘War on plastic’, or ‘wild fires’ rather than ‘the environment’.
Even the latest report by The Investment Association noted ‘we should replace the term “sustainable” with “responsible” when referring to firm-level approaches that include ESG integration and stewardship.’
(3)Start with small steps
You also need to work out the level of change your clients are happy to take.
Do they want to go all-in and actively switch all their funds?
Or, as our research indicates, are they more likely to prefer to take smaller steps? Assuming most clients have a wide-spread of fund investments they can evaluate their fund selection based on a variety of criteria.
You might start by looking at the top ten stocks in each fund or simply identifying key ‘sin’ stocks (tobacco / drilling for oil / sweatshops / gambling), thereby divesting from funds that don’t meet those criteria.
(4)Offer a choice
According to a survey conducted by Square Mile Investment Consulting and Research early this year only 39% of advisers claimed that ESG was integral to their way of working, whilst less than half (46%) included ESG in their Attitude to Risk Questionnaires.
The industry has a long way to go, but simple ESG questionnaire could demonstrate to your clients that not only do you have their financial interests at heart, but their personal values as well.
Research shows that if you talk about ESG in terms of choice, clients will respond positively. Furthermore, the perception that ESG gives you a binary choice between ‘doing good’ or ‘making money’ no longer holds true.
“I was concerned I might lose money, but I looked at the performance and it’s comparable to other funds.”
Recent history demonstrates that companies in the bottom ten percent of ESG ratings often achieve low scores because of poor governance.
Equifax achieved a poor ESG rating before the data breach scandal
Facebook achieved a poor ESG rating due to privacy issues, which led to another scandal
And BP earned a low ESG rating due to concerns over outsourcing maintenance, which led to the catastrophic deep water horizon incident.
ESG can actually protect your investments by qualifying risk.
(5)Offer a brighter vision of the future
Groups like ShareAction and Make My Money Matter do a brilliant job at explaining ESG. They argue that investors have £3 trillion invested in UK, but that few people have any idea where their pension is invested.
In terms of your carbon footprint they also claim that switching your pension to more sustainable funds can have 27 times more impact than giving up flying and becoming a vegan.
Why not take advantage of these excellent resources and leave your clients with hope of a better future?