Putting ESG into financial planning

ESG has changed the investment landscape but how can advisers incorporate it into their financial planning process?

ESG is changing financial advice, driven primarily, it seems, by advisers’ principles. Nearly half (48%) of advisers surveyed by Aviva Investors believe it is ‘morally and ethically the right thing to do’. Other factors include client demand (25%), regulatory change (17%) and investment performance potential (10%).

Steve Waygood, chief responsible investment officer, Aviva Investors

‘We’ve seen [an] enormous shift,’ says Steve Waygood, Aviva’s chief responsible investment officer. ‘It’s been part of Black Lives Matter, Me-Too, the Extinction Rebellion. There’s a whole raft of social media-fuelled norm shifts in society that have changed the way we eat and live.’

There’s a whole raft of social media-fuelled norm shifts in society that have changed the way we eat and live
Steve Waygood, Aviva’s chief responsible investment officer

The proportion of client assets that are in ESG, ethical, impact or sustainable funds has grown to 17%, according to an adviser survey by NextWealth. ‘It’s more than doubling year-on-year, but it’s still quite a small proportion of portfolios, mostly driven by clients asking their advisers about the opportunities,’ says Heather Hopkins, managing director of NextWealth. ‘There’s a huge commercial opportunity for clients to see investment growth, but also for advisers to differentiate their proposition.’

Some 87% of respondents to the Aviva poll plan to change the way they ascertain clients’ ESG preferences. An open-ended question, such as one suggested by Gavin Francis, founder and director of impact investing consultancy Worthstone – ‘what are you trying to achieve with your wealth?’ – can help to frame the conversation, says Hopkins.

There’s a huge commercial opportunity for clients to see investment growth, but also for advisers to differentiate their proposition
Heather Hopkins, managing director of NextWealth

The Investment Association’s Responsible Investing Framework is a useful visual cue in these conversations. ‘It can help the client determine where they sit within that, from having zero interest right across the spectrum to philanthropy,’ says Hopkins.

Four approaches

Around 43% of advisers see ESG as a complement to conventional investment solutions, 41% as a minimum baseline for all clients and 15% as a niche offering. Ensuring products reflect principles is not always straightforward, however.

Waygood outlines four possible approaches. As a first base, has the investment provider signed the UN Principles for Responsible Investment? Does it have a credible approach to integrating ESG across all asset classes, products and regions? Is it well-resourced? Is it transparent?

Secondly, is it an active owner? ‘Engagement for me personally is the most important of all of these strategies,’ he says.

Thirdly, there remains a place for exclusions. The Aviva Stewardship funds, originally created by Friends Provident in 1984 based on a Quaker approach to investing, exclude companies that do not meet certain ethical standards. ‘Certain faith communities have clear principles that they wish to avoid certain things, so for them, exclusion matters enormously,’ says Waygood.

The final approach focuses on ESG preferences and is often termed ‘thematic investing’. Aviva Investors Climate Transition Global Equity Fund is an example, likewise funds that focus on renewable energy, sustainable food production or any number of the 17 UN sustainable development goals.

Waygood explains that all four strategies are utilised across the Aviva Investors range and believes they can be combined, albeit active ownership and negative screening are not easy bedfellows. ‘You can’t engage and vote on something you don’t own and never will,’ he says. ‘That’s a dilemma, but it’s for the individual to resolve because it’s their money.’

The Aviva research also found that 70% of advisers want third-party help with ESG research and due diligence. Square Mile Investment Consulting & Research has recently acquired Ethical Money to enhance its capabilities.

‘We will take a portfolio and map the entire security content to a sustainable development goal to see if in fact, the fund manager is doing what they say

‘We will take a portfolio and map the entire security content to a sustainable development goal to see if in fact, the fund manager is doing what they say,’ says senior investment consultant Jake Moeller. ‘We will do the heavy lifting…  so that we can provide those readymade answers for the advisory process.’

Three questions with Thomas Stokes, investment director

1. How can Aviva Investors help advisers when it comes to ascertaining clients’ ESG preferences?

Most advisers already ask questions about ESG preferences during their factfinding process, but it’s usually quite binary – ‘yes’ I have ESG preferences or ‘no’ I don’t. Asking a client a question like ‘Would you be happy if your pension assets contributed to climate change?’ is very emotive. I personally don’t know anybody who would say ‘yes’. Framing questions in this way will generate a different set of results. Aviva Investors has designed a selection of questions to help advisers have more in-depth ESG conversations with their clients. We’ve gone down a similar route to a risk profiling questionnaire. With both risk profiles and ESG preferences, you’re trying to measure the intangible. However, ultimately, it comes down to good conversations between advisers and clients.

2. What help is there for advisers in reliably rating the ever-expanding universe of ‘green’ funds?

Many fund research tools and consultants that advisers are already familiar with have started to provide a lot more information about ESG. This should help advisers filter through the fund universe to conduct their fund research and due diligence. It’s important not just to focus on the funds but also to check the parent company’s credentials. More credible providers will have ESG hardwired into their broader business as well as their individual products. A good way for advisers to separate the wheat from the chaff is to ask their fund managers questions about how they’re being responsible investors. The details contained in voting records and engagement case studies are illuminating. The fund managers that you recommend should be able to provide you with all the evidence and data you need. If they can’t, it’s a warning signal that they’re ‘greenwashing’.

3. What’s next? Can advisers expect to see a traffic-light system rating funds on their ESG credentials and/or risk-rated ESG portfolios, and when?

There is no industry standard, which can be confusing and even a bit daunting. But equally it’s exciting because its means we can all have a hand in shaping the approach to ESG in the future. Over time, I’m sure that we’ll start to see an industry standard start to emerge. The first step towards this is for the regulator to set out what it expects from the adviser market in terms of embedding ESG into their businesses. However, there’s already a lot of third-party data and ESG research for those who want to get ahead of the curve.

This article first appeared in Citywire NMA

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Important information

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature.

Information contained herein has been obtained from sources believed to be reliable but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future.

The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested.

Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. This material is not a recommendation to sell or purchase any investment.

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