ESG (environmental, social and governance) is a hot investment topic right now.
A quick Google search for ‘ESG investing’ returns almost 47 million links, and new articles are being published in the financial trade press on this topic every day.
‘Ethical investing’ was regarded as very niche not so long ago, but it seems the tide has changed. So what's driving this?
News about the exploitation of third world workers, global warming, seas full of plastic and the need for sustainable consumption are all elements that are making people stop and think about how they live their lives.
But for advisers, the need to engage with ESG investing isn’t just being driven by client demand.
Regulation is coming shortly that means you will need to have meaningful conversations with clients to make sure their investment choices align with their ESG aspirations.
These conversations must also be documented, to evidence that you are assessing and reflecting your clients' preferences as part of your business process assesses.
At the time of writing, the date for the new regulations to come into force has yet to be confirmed, but this is expected to be early next year.
The type of information you'll need to discuss and carefully document with clients includes how much impact do they want their investments to have in ESG terms, as well as how those choices might affect long-term performance.
Client conversations should also cover the issue of 'greenwashing', what it is and how to recognise it.
Things to consider
To help you to get informed, we've put together an in-depth white paper that summarises what you need to know.
The paper, called ‘ESG in Investing: everything you wanted to know but were afraid to ask’, provides an overview of the information needed to advise clients in this area of the market.
Key elements of the white paper include:
- The characteristics of responsible investment: are companies with higher ESG ratings better run? It also examines why caution is needed in making universal assumptions.
- How responsible investment portfolios have performed: a review of performance and what this could mean for future asset allocation.
- Forthcoming regulation in the advice market: an overview of what advisers will have to shortly comply with, plus a brief toolkit to help advisers prepare.
The paper lists and explains the main terminology around ESG investing, and puts this into context for advisers and clients.
It also covers the history and size of the market, including a round-up on how the ESG market came about, where we are now, how significant this area of investment currently is and how quickly it is growing.
Aside from the need to prepare from a regulatory perspective, it’s likely your clients will welcome conversations that help them explore how they really feel about their investments.
Clients can better understand the potential for their investments to have a positive impact on our changing world, while still making the returns they need to meet their long-term goals.