Published by Aviva Investors November 20
Most financial advisers are convinced that ESG investing will make up a larger part of their business a few years from now. But just 5 per cent say they're confident in their ability to make recommendations.
So, how exactly do you start the ESG conversation?
We asked a few experts for their advice.
Expect a different start every time
David Munton at 2plan has been dealing with ethical investments since the early nineties. He says he prefers to start with general questions such as,
"Do you have anything you want to look at when you were looking at investments?
Are there any ethical needs, that you want to make sure you avoid or embrace?"
He also adds that one should never come with any preconceptions about age or bias between the sexes.
Though he cites one example of a client who wasn't ethically invested, but became so because of his wife’s attitude. While another client who was ethically invested, went non-ethical, because his wife’s portfolio did better.
Look beyond exclusionary funds
Ruth Whitehead of Ruth Whitehead Associates also claims that in her experience there is no difference between men, women and ages in terms of involvement. She says that a more positive skew has come more to the fore over the last 10-15 years.
"In addition to exclusionary funds that avoid sin stocks, like oil and weapons, it’s important to discuss impact funds that make a positive contribution like renewable energy , educational funds or companies that actively promote women or minorities."
Take a deep dive
Former Chair of the Ethical Investment Association, Julian Parrott, has specialised in ethical investing for the past 20 years. He explains that his approach is all about fact finding and stresses that the "Do you have any ESG considerations?" question is too closed.
In his view you need to look for open questions way to frame the issue and get clients talking.
"So for instance, you might want to give an example of an existing client’s beliefs and values and how that impacts their investing behaviour, then ask 'Do you have any concerns that you would like to be taken into account when investing?'”
He offers four territories to explore:
Issues discussed – especially aspirations for children & grandchildren – as such would the client be interested in adopting an investment approach that is geared towards reducing climate change?
Client’s profession & social involvement - community work, level of charitable giving.
Interests - clubs, societies and pastimes may also open up the conversation.
Inherited money - often clients feel a sense of stewardship when it comes to inherited money, especially if they have family they could pass it on to in future. What do they hope to do with it?
Consider values versus behaviour
Rebecca Aldridge at Balance Wealth also favours an open, investigative approach. She explains,
"Finding out a client’s ESG preferences is not a simple as saying “Do you want to invest ethically?”
"You need to address the client’s expressed wishes versus how they actually behave day-to-day.
"For example, a person might emphatically say that they are highly principled about certain issues, like renewable energy.
"But do they source their own energy from a renewable supplier? Do they have solar panels? Do they drive electric vehicles or only use public transport?“
She claims that the starting point has to acknowledge that most of us have values and principles that influence the key decisions we make.
“For some people that influence is tiny. For others, the influence is completely consuming and visible in their daily lives.”
In her opinion, values-based investing is a continuum too, ranging from basic exclusionary funds to highly selective impact portfolios with strong ESG credentials.
“I think starting [a conversation] is easy with a good question. It’s developing that into a conversation that actually provides you with meaningful information that’s more challenging and doing something useful with it.”
She suggests opening with something like:
“We all have values and principles that impact on our decisions, whether that’s based on upbringing, religion or general societal awareness about the world we live in and its future. What are the key values that are important to you?”
Make sure the client realises they’re limiting the funds available
Of course the trade-off between performance and ESG factors has long been a problem for some advisers.
But evidence shows there is a positive link between ESG considerations and financial performance. In fact, 41 of the 56 (73%) Morningstar ESG indices have outperformed their non-ESG competitors.
So yes, you’re narrowing the field of funds available, but according to Morningstar, there are now more than 2,405 sustainable funds based in Europe, with 305 fund launches in 2018 and 360 last year.
It’s also worth noting that figures from the Eiris Foundation show investors worldwide poured £33.5 billion into green and ethical funds in 2020, compared to £25.3 billion in 2019.
The trend is only set to continue.