Responsible Investing Proposition - White Paper

By: Brigid Asquith-Hunt

During the Spring of 2021 a number of research interviews were undertaken with a variety of industry participants in the wealth management and financial advice sectors. The purpose of the research interviews was to ascertain the appetite for the provision of a pro-active responsible investing proposition to investors and financial advice clients. The perceived hurdles or obstacles in delivering on that pro-active proposition were also discussed, as well as available solutions and support.

With the shifting sentiment that exists around climate change, personal and societal consequences of the global covid-19 pandemic, generational impacts, as well as an unprecedented seismic transfer of global wealth occurring, there is a growing desire of individual investors to invest their wealth consciously and responsibly. There are a number of global studies that report both the record flow of investment funds into Environmental, Social and Governance (ESG) strategies and that show how investment in global sustainable funds continue to outpace the market.[1]

Interestingly though, a recent report observed that in Australia, only 16% of financial advisers had been asked by their clients for ESG investments[2]. Yet it appears that the majority of individual investors (83%) wanted investments that aligned with their assets and values. Why the disconnect? To understand this, and to outline a path forward, was the goal of the research interviews.

"Responsible investing is rapidly turning into table stakes. You wont get past square one without showing that you are serious about it."

Positioning

Recent findings show that 67% of Australians believe ethical or responsible banks perform better in the long term and 62% of Australians believe ethical or responsible super funds perform better in the long term (up from 29% in 2017)[3].

"The general population has discovered they can invest well and, in a way, consistent with their values. But most advice firms are not sure how to talk about this with clients and prospects."

Before even going down the path of offering a responsible investment proposition it's important to firstly consider your business' position on sustainability. To what extent is sustainability integral to the fulfilment of your own business' vision, mission and values? Has your business considered, or has it already taken steps, to reduce its carbon footprint? To quote a long-standing practitioner in the industry who is a vocal proponent of responsible investing, advisers "need to believe in it - it needs to be part of their DNA."

"Show that your own business is green. Be prepared for the question, 'so what are you doing about it?'"

When responsible investing is integral to you and your business' position in the community then you will be in a far more powerful position to address objections that clients and prospects may put forward as you share your responsible investing proposition.

"The best advisers in this space don't see sustainability as an add-on. They view it holistically."

Awareness

Despite growing sentiment in the general population that ethical or responsible banks/super funds are more likely to perform better "there still is a potential hesitation" reflected one research participant. "There's a lot of opposition and misinformation in the media. Advisers need to be able to overcome objections" commented another a research participant. This is where knowledge and awareness are important and the suggestion made was to "subscribe to key research and papers on ESG and responsible investing ... monitor news on the subject."

With that knowledge will come the confidence to build the awareness and understanding of your clients. In particular, regular education content and information sessions can address the common questions that your clients have. There is also tremendous value in developing scripts that address the common questions and objections that your clients have in your day to day interactions.

"It's important that advisers realise they don't need to know all the answers. They are not scientists and are not required to be. But they need to be able to show people that they know what the relevant questions are."

Values, Goals and Risk

It goes without saying that in most Discovery Meetings advisers are unearthing values. But, to quote a research participant, assuming clients wish to invest according to their values, advisers need to also ask: "what's your tolerance for potential short to medium term variation against the benchmark?" There is growing evidence that, globally, ESG funds perform well and even display less volatility than non-ESG funds over the short term[4]and locally, responsible investments typically achieve stronger risk-adjusted financial performance than their peers, consistently outperforming against benchmarks over short-term and long-term time frames[5]. Despite this, it's still obviously important to assess your client's risk appetite. One research participant suggested framing the discussion as one of "risk, return and impact." At the end of the day it's still about clarifying your client's priorities and understanding the trade-offs that they're willing to make or not make.

"The truth is that over the long-term, you can generate very similar returns with a sufficiently diversified, low-cost ESG strategy, so long as you are clear about what you are targeting."

Once that tolerance to risk is assessed it can be said that the key to success in responsible investing is being very clear about goals. To quote a research participant: "Some people make the mistake of trying to target too many variables in one strategy."

There are tools (such asEthos ESG) available now to assist your clients articulate the issues that they care about, and why, across a variety of themes (from climate action, to gender equality, to innovation, etc). Alternatively, your client may be passionate about one or more of the UN's Sustainable Development Goals (SDG). For example, SDG 13 Take Urgent Action to Combat Climate Change alludes to the reduction of global greenhouse gas emissions as a means to addressing the adverse impacts of climate change. Fortunately, there are many ESG strategies available now that principally target a reduction in greenhouse gas emissions given this is now reported, or estimated on, by almost all public companies, globally.

"The keys to improving investors' knowledge, I think, is to be very clear about their goals. Firstly, you are investing for a particular reason - whether it be funding retirement or managing your estate or whatever. Secondly, you want to do so in a way that is consistent with your values. So you have two decisions, not one."

Define Success

Once values, goals and appetite for risk around responsible investing are established, clarity needs to be established around measures of success and that depends on how your clients define success. A research participant articulated it like this: "We invest, after all, to look after our future consumption needs. So a successful investing approach will maximise future consumption requirements. A successful responsible investment approach will do that, plus ensuring your investment choices are consistent with your values."

The challenge at present for those who are implementing a responsible investment strategy is having outcomes that can be measured and that are transparent.

"ESG governance is an alphabet soup of reporting."

Globally, there are currently five leading voluntary frameworks and standard-setters. That's in addition to the of plethora of global bodies directing climate-related financial disclosures. And then there's investment industry specific bodies, as well as the various benchmarks and rating agency assessment models.

"There is a lot of jargon to cut through. There are different ways of measuring responsible investing, a myriad of ratings systems and a lack of consistency in regulation."

Implementation

The good news is that at the heart of these standards, disclosures, etc is the belief that the interrelation of environmental, social and governance factors is increasingly material to long-term value creation. Clients of advice firms, investors and stakeholders more broadly now expect companies to report on non-financial issues, risks and opportunities with the same discipline and rigour as financial information. Your value as an adviser, firstly, is to help your clients make sense of the choices out there simplify the complexity.

Secondly, supporting this role, is having a thorough and robust investment framework in place which helps set your clients on the path to achieve their values and goals over the long term. For your business the foundation of this framework is the overarching Investment Philosophy. For your relationship with your client, the foundation of this framework is the expanded Investment and Impact Policy Statement that talks not only to broad investment goals and objectives, asset allocation, risk tolerance, etc, but also layers in responsible investing.

Thirdly, is your expertise in translating your clients values and goals into investment strategies. Whether that is through individual investment strategies or through the building of a number of pre-built portfolios or models. There are an increasing number of solutions available to assist you here such as Sustainable Platform and Ethos ESG, as well as ratings agency reporting such as Sustainalytics, as well as the ERIG Index.

Reporting and Staying on Track

Reporting on the achievement of values and goals, both financial and non-financial, is probably the most valuable deliverable in terms of keeping your clients engaged on their impact journey. Depending on how you have implemented the solution for your clients, this could be reporting on actual tangible metrics such has greenhouse gas emissions or, alternatively, this could be providing a metrics-based assessment. It is important that your clients understand that metrics and ratings are subjective and a reflection of the providers interpretation of standards, etc. They are very useful, though it is not uncommon for one security's ESG rating to vary across providers.

Integral to this is also regular communication to your clients, in particular, poignant and memorable stories. These are what make it real to your clients. Yes, performance is important to the achievement of your client's financial goals which is why it has long been the discussion of many of their BBQ conversations, but imagine the BBQ conversation being extended to the real-world impact that their investment strategy is having!!

"share the stories - what you've achieved and being able to measure the metric tonne of greenhouse gas emission that you have saved by the particular investment strategy."

There's also the opportunity to tailor a unique service proposition for responsible investing clients. This could incorporate targeted client events from hearing about impact-led action taking place at an organisation that is part of their portfolio, or educational events for client's children who would appreciate learning more about responsible investing.

Widen Your Impact

As an advice professional you are in a unique position to have a wide-reaching impact through the provision of your responsible investing proposition. This is where your online presence can help to build not only your impact, but your business as well. Surprisingly not many advice firms communicate a responsible investing proposition, front and centre, on their website. Many have an off-the-shelf, opt-in solution available on request; others might have an article or two buried somewhere in the news section of their website; not many have a pro-active responsible investing proposition and actively market that proposition online, on their website, in blogs and on social media.

"Advisers should think about marketing their interest in sustainability a little more widely. Show that you walk the talk."

Would you or your business like help in implementing a responsible investing proposition? Why not get in touch.

To our research participants, thank you for your time and contribution. By sharing your wisdom and knowledge here, and in the community more broadly, you are contributing to the legacy of the advice profession, society at large and the environment on which we are so dependent.

"Your job as an adviser is to help people secure a sound future. That's your key role. How can you do that if clients are investing in activities that threaten the possibility of a liveable world this century? Wealth and environment and economy and life are not separate entities. One cannot exist without the other. Get that message out and people will listen to you."


[1] Morningstar Global Sustainable Fund Flows Report

[2] Natixis Investment Managers ESG Report

[3] Responsible Investment Association Australasia From Values to Riches 2020

[4] Morningstar Sustainable Funds Weather Downturns Better Than Peers Lauricella and Liu 2020

[5] Responsible Investment Association Australasia 2020 Benchmark Report

Disclaimer: The information contained in this communication is general in nature and does not take into account your objectives, financial situation or needs. Because of that, before acting on this information, you should consider its appropriateness, having regard to your objectives, financial situation and needs. We recommend you obtain financial advice tailored to your own personal circumstances. Past performance is not a reliable indicator of future performance. The value of an investment may rise or fall with the changes in the market. Any reference to a provider or solution is not a recommendation or referral

Partner in Time Consulting Pty Ltd ABN: 52652298318

About Brigid Asquith-Hunt

Brigid is a Director of Partner in Time Consulting Pty Ltd. Brigid's consulting services leverage her depth of experience across business strategy & growth, learning & development, practice management and client relationship management, as well as her strengths in communication, collaboration and facilitation.

Brigid is passionate about organizations consciously and sustainably achieving great outcomes for the long-term benefits of shareholders, employees, clients, community and the environment. Her experience includes Environmental, Social and Governance (ESG) investment and ethical decision making. Brigid supports the UN Sustainable Development Goals as a blueprint for future prosperity. Brigid also seeks opportunities to contribute to philanthropic and social enterprise ventures.

For more information, please visit partnerintime.com.au

To get in touch, please email: brigid@partnerintime.com.au

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