Do I need an ESG CIP?

6 min read 29 Jun 20

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When debate crosses the boundary between sector specific and mainstream media, it’s usually because it has human interest at its core. In the case of retail investing, one such topic is ESG. The avalanche of articles and information reflect the momentum we’re seeing in investor demand.

Influencing a changing demand

There are demographic reasons for this, as consumer preferences change. We know that millennial investors are two times more likely to invest sustainably than their parents.  In fact, global millennial spending power has now overtaken generation X, presenting a significant commercial opportunity for the financial services market. Furthermore, it’s estimated that around £327bn will be passed to around 300,000 UK inheritors in the next 10 years, representing not just an intergenerational shift of wealth, but an intergenerational shift in investment views and behaviours – for a sense of scale, Financial Advisers in the UK currently administer around £274bn of private clients

Practical influences are important too such as the actions of environmental campaigners like Greta Thunberg.

More recently COVID 19 has focused peoples’ minds on building a better future. There’s the environmental impact of the way we live our lives, the way many communities have pulled together and the way some businesses have responded (and whether or not this makes them good global citizens).

These influences may not yet be directly influencing the questions your clients are asking you. But, from next year, MiFID 2 changes mean that the advice process must address clients’ sustainability preferences. In other words, your fact-finding questions may need to be much more exploratory than they are just now.

Embracing the change

You’re perhaps wondering how to start this conversation. After all, there can be a perception that subjects like climate change are too political to broach with clients.

But, a different way to look at this is the opportunity your clients have to do something positive with their money. It’s not simply avoiding investing in companies and sectors that are perceived as ‘bad’; but looking favourably at companies who behave better and through to those directly tackling some of societies bigger challenges such as accessible healthcare and renewable energy. it’s investing in long term solutions to some of the big issues we face collectively – such as healthcare and renewable energy.

For clients who’re working with you to plan their retirement, there’s potentially a strong emotional and practical correlation between invest in a sustainable future for at least with some of their portfolio the requirement for a sustainable retirement income.

We’re already seeing many firms adapting their CIP and CRP processes to include these options. For some it’s a key part of their PROD segmentation and for others, they’re discussing it as part of their intergenerational wealth transfer policy within their CRP. Again, the desire to sustain family wealth to pass on to the next generation is highly compatible with sustainable investing.

Defining ESG?

It’s at this sharp end of the advice process, when these firms start getting down to the nitty-gritty of how they’ll implement their thoughts, that some of the complexity of this market unravels.

Firstly what are we actually talking about? Is it ESG, responsible, ethical, impact or green investing? They all mean different things but they’ve become interchangeable.

There’s good news on the confusing taxonomy front; this policy research paper published by Morningstar gives some insights into plans to move to a common language for communicating with investors. However, there are no doubt many hurdles to overcome before we reach industry consensus and this isn’t a quick fix.

Until then, advisers are on the front-line working to help clients understand their options.

Find a starting point

There’s not necessarily a right answer here, it’s just about developing a mutual understanding.  I believe that starting at this higher level of sustainable and responsible investing (SRI) helps set some context. It’s then easier to move into conversations with clients about what shade or flavour of SRI is more relevant to the client.

So, the first thing your proposition should make clear is how you’re defining the SRI conversation;  what the options are and how your clients’ views will influence this. This approach can help you avoid speaking at cross purposes and ultimately avoid the risk of   inadvertently putting an investor into a ‘similar but different’ solution, for example an ethical investor into an ESG solution

Set out the starting point and then explore the client’s views to see which path is most appropriate.

Building your solution

Secondly, on the basis that not all of your clients will have the same opinions in this area, what CIP / CRP options will you present to them?

For those running advisory model portfolios, do you have the knowledge, time and resource to build a range of risk-graded models for each of these shades of SRI?

Whatever your core chosen option, it’s important to make sure it covers as wide a range of client segments as is logical and practical. Your outlier clients may be better suited to more specialist solutions.

The range of solutions has evolved hugely in recent years with investment approaches becoming much more inclusive. The positive screening process used by many focuses on including those companies doing good, rather than the more traditional, negative screening approach, that focuses on excluding firms that operate in certain markets.

Blending the two approaches allows fund managers and DFMs to consider more arguments and in turn, allows advisers to support broader client segments.

What about outsourcing?

So at this stage of the process, you may think it’s easier to outsource a lot of this work. Some investment houses have a range of risk rated SRI funds - a sort of plug and play option. But, DFMs or third party models are currently very popular.

Research houses are helping fill these propositional gaps. Their IP and research processes often incorporate SRI ETFs among the funds to keep costs down.

A number of DFMs on the M&G Wealth Platform run risk-rated models across the whole SRI spectrum for clients. These can either be designed to their specifications or based on their in-house views. In fact, the flexibility of working with a DFM in this segment means they can also manage bespoke portfolios on the platform for those outlier clients who have views and objectives not covered by you core SRI CIP. Think religious beliefs, charities or even investors that just don’t like one of the firms your standard model invests in.

Getting personal

So, as you consider all the other issues that affect how you run money for your clients, now is the time to include SRI in your plans.

When it comes to ethics and values, you’re dealing with innately personal beliefs that can be very specific and deeply held. There may be no room for compromise to the point where a portfolio may need to be built of individual equities that complement the particular client’s view.

It’s maybe not ‘easy being green’ but I’ve no doubt that these very personal client conversations can only cement and further deepen your relationship with them.