Roadmap to ESG series - Part one

Our planet and the impact our actions have on it has never been more under scrutiny. There’s also a heightened awareness of the need to respect people and their human rights. So, it’s no wonder that the spotlight is shining on Environmental, Social and Governance (ESG) issues in relation to investing.

When it comes to financial advice, some financial planners are ahead of the curve in ensuring their clients are fully informed, aware of investment options and have portfolios that perfectly align to their specific requirements.

However, it’s fair to say that many involved in the financial advice profession are at the early stages of engaging with this topic. It’s a complex area that takes time to fully understand, let alone formulate a roadmap for handling it with multiple clients.

That’s why we’ve partnered with specialist research consultancy NextWealth for a new series - Roadmap to ESG - to help financial advisers formulate and implement a robust ESG approach.

Over the coming months, we’ll share insight and experiences from advisers at various stages of their ESG journeys and set out the ultimate roadmap to ESG success.

Join us as we begin our journey with a look at what other financial advice businesses are doing and the foundations of a good ESG approach.

Where is the industry at and how do you compare?

The latest research into ESG investing carried out by NextWealth shows that:

  • Including a question about ESG in the Know Your Client process is becoming the norm – in 2021 just 6% of advice professionals did not, compared to 17% in 2019.
  • There is some confusion about whether ESG is part of a product recommendation. One in five (20%) surveyed said they ‘don’t know’, reflecting ambiguity and uncertainty about the rules
  • The percentage of clients raising the topic of ESG is increasing: up from just 7% in 2019 to 20% in 2021. Advisers in larger firms, with more than 50 employees, said it comes up even more often, at 26%.
  • Just 3% of those surveyed said that none of their client assets are invested in ESG funds or solutions, compared to 10% in 2020 and 7% in 2019.
  • Advisers expect two thirds of their client money to be invested in conventional funds with no specific ESG, ethical impact or sustainable criteria.
  • Looking ahead, advisers expect one fifth of assets will be in funds which have full ESG integration and 13% will be in badged funds or solutions with specific sustainable investment or carbon reduction objectives.
  • Among financial advice professionals that are using badged funds, there is a strong preference for those badged as ‘ESG’, ‘Ethical’ and ‘Sustainable.

The foundations of an ESG approach

While many financial planners are including a question about ESG in the fact find, in 2020 two thirds (64%) asked about ethical considerations rather than broader issues relating to sustainability or environmental concerns.

With legislation on the cards that will mandate financial advice professionals to ensure clients are suitably invested in ESG-related options, it’s clear a ‘tick-box’ approach will not be enough. More importantly, with growing consumer awareness of ESG issues, your clients will expect you to take a lead and ensure they are fully able to make choices that align with their preferences.

Laying foundations for your ESG approach is the best way to start. Building a strong framework needs to be done from the bottom up and there are things you will need to consider from the outset.

The ESG questions to ask

  • How much do you and your firm know and understand about the topic?
  • How do you and your firm’s principles match up to scrutiny? Can you ‘walk the talk’ in terms of sustainability, governance and social responsibility? As one financial adviser told us “you can’t hand your client a plastic water bottle and then spend the meeting talking about sustainable investing.”
  • How do you approach ESG investment options? If you outsource, how do you test what you are told is true? If you build portfolios yourself, how do you manage integration and diversification?
  • How do you tackle conversations with clients? What happens if they decide they want a high impact portfolio but the cost is far greater than they are prepared for? How do you manage expectations?
  • How do you track progress and manage MI? It’s likely you will be taking your clients on a journey to making their investments a force for good but how do you keep track of who wants what?

Five stages of ESG implementation

At the outset, it’s worth looking at the five key stages of ESG implementation:

1) Exploration
2) Installation
3) Initial implementation
4) Full implementation
5) Expansion and scale-up

However, even before the exploration stage, you need to decide who will take the lead on developing an approach that the whole firm can buy into. Set aside time and allocate specific tasks that have end dates attached. Regularly review progress and be clear on what needs to be achieved and when.

If you follow a clear process, you will save time and achieve a better overall outcome that your clients will appreciate. Follow us on Linkedin for the next article in our Roadmap to ESG series where we focus on the first step: Exploration.

Roadmap to ESG part 2: Exploration

Continue your ESG journey by following us on LinkedIn for the next article and collect the full eight-part series. You'll also be among the first to be notified when our complete Roadmap to ESG guidebook is available.

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