When a client expresses a preference for sustainable investing, I’ve found that advisers often try to capture a detailed list of specific sectors they would like to exclude. I’ve seen many factfinds that ask clients to list out the areas they are not comfortable with. Taking this approach sets an expectation that you will be able to meet these detailed requirements.

    Some sectors are easy to avoid through funds or DFM portfolios (arms, tobacco etc) but it can be harder to deal with more niche requirements. In recent months I’ve spoken to a number of vegans looking to ensure they are not investing in any kind of animal product. I’ve also worked with clients with requirements to exclude Israeli products. 

    This type of niche exclusion is almost impossible to maintain using collectives. You may be willing to spend the time to create a suitable portfolio on day one, but you will then be left monitoring hundreds of stocks on an ongoing basis. Taking this approach can leave you exposed to a huge amount of work as well as nasty surprises.  

    Talking to clients about themes means you are more likely to achieve a suitable outcome without the need to create a number of bespoke solutions. It also helps keep the focus on the positive inclusions. I talk to clients about investing in the transition to a low carbon economy or in sectors promoting good health outcomes. Talking about different investment themes and being honest about the compromises that may be required will give a more suitable outcome and a more satisfied client.  

    Be honest 

    We should be clear that there is no perfect company. From time to time, there will be mistakes. We’ll find out things have gone wrong at companies we celebrated, or they have started working in a way that means they are no longer compatible with an ESG mandate. Sustainable investing is just crossing over into the mainstream and it’s inevitable there will be issues along the way. Boohoo and Kingspan have both been involved with controversy despite being fairly common holdings in ESG portfolios. I think it’s important we don’t oversell to clients; ESG and Impact Investing are a work in progress. 

    We also need to be honest about performance. Some of the sectors favoured by sustainable strategies have benefited from Covid tailwinds. It’s possible this will reverse as some parts of the markets recover. For long term investors, this shouldn’t matter because structural changes will continue to drive growth in ESG favoured sectors.  

    Be clear about your terms 

    Make sure that you and your client are talking about the same things. The term ESG is not used outside financial services so I try to avoid it altogether. An ESG mandate considers a company’s behaviour or operations, whereas an Impact Investing mandate will additionally look at the product or service provided. 

    In my experience, the clients who express interest without prompting are more likely to be interested in an impact strategy. Clients more concerned about cost or those simply looking to manage risk within their portfolio are more likely to be interested in ESG strategies. 

    The most important thing here is for advisers to be clear with clients about where their solution is on the spectrum.  

    Don’t make assumptions 

    The idea that only millennials are interested in the environment is a myth. A recent study found that the baby boomer generation is more likely to minimise their environmental footprint. It’s not the under 40’s buying Teslas.  

    People’s views on issues change over a lifetime. Becoming a grandparent often triggers a reassessment of priorities. I’ve met some typical ‘fiery reds’ with successful City careers behind them who have made changes to their thinking as they move into retirement. We need to make sure we keep asking the questions so we can adapt to shifts in clients’ priorities.   

    On the other hand, we should be aware of the potential to lead our clients. A client once told me he’d only said he wanted to exclude tobacco because he thought he should say something. He didn’t want to feel he was being judged for saying he had no ethical concerns. The way we phrase our questions can have a big outcome on the answers given.

    Get help 

    The new regulations that require advisers to ask clients about their preferences and the growing number of clients expressing an interest mean that advisers need to decide how they want to approach sustainable investing. Do you want to build a solution yourself, or should you outsource?  

    Building your own solution can effectively mean setting up a second CIP. This is a significant investment in time, both in terms of initial learning and ongoing research. To run an effective portfolio you will need the time to monitor the investment and sustainability metrics of your chosen funds. Many firms are choosing to work with expert DFM partners rather than take on this job themselves. It makes sure working with clients interested in sustainability is profitable.

    Jeannie Boyle was a recent presenter at our Illuminate live events. If you didn’t get an opportunity to attend, you can access Jeannie’s talk here.

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