Now is the time for advisers to grasp the ESG opportunity

Jack Rose (pictured), Strategic Sales Director at Triple Point, writes that ESG just cannot be ignored, post-pandemic…

As we continue to confront the fallout of this pandemic and the new challenges that will emerge, it’s clear that ESG (environmental, social, governance) will become an explicit consideration that cannot be ignored by financial advisers in the retail investment space.

Responsible investing has been one of the most rapidly growing movements in finance over the last decade. A coalescence of public sentiment, regulation, business sense, and the momentum of a younger generation with a focus on ESG impact as a central goal – have contributed to its rise. The fact that we are about to see the greatest generational transfer of wealth the west has ever seen, suggests that advisers would be wise to engage with ESG for their business continuation plans.

Increasingly financial institutions and asset managers have announced their intentions to integrate ESG factors into their investment processes. As BlackRock CEO Larry Fink has stated, “Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”

Although ESG hasn’t traditionally played a significant role in retail investing, the outbreak of the pandemic will likely accelerate traction in the space. The crisis has supported the investment case for ESG both in terms of the performance of sustainable funds and the swell of support from ordinary investors and clients. What’s more, the imminent regulatory changes we are about to see will make ESG an explicit consideration for screening, analysing and selecting investments moving forward.

This may be new territory for some, but there are real benefits for advisers to enhance their client relationships, investors to build more sustainable portfolios, and for society as a whole to benefit in the long run if advisers grasp the ESG opportunity.

Rise of ESG and responsible investment

Across the world, there is an increasing recognition that in order to deliver a more sustainable future, businesses must not only profit financially, but also demonstrate how they are benefiting society and the environment – whether this is helping to protect ecosystems, improve health and education, reduce inequality and spur economic growth.

Globally, governments and policy makers are now making ESG criteria a priority. The UK Government has been a pioneer in driving socially responsible investing. Indeed, only recently the Government endorsed the launch of Richard Curtis’ Make My Money Matter campaign, encouraging savers to take more interest in the ESG aspects of their pension holdings and to take decisions on the allocation of their funds more aligned with sustainable investment principles.

Retail investors, who had been a step behind their institutional counterparts, are accelerating their focus on ESG and we are seeing this across the space today. In one survey of 200 UK IFAs conducted by Federated Hermes, 85 per cent have seen an increase in client requests to allocate capital to ESG-integrated funds since the start of the coronavirus outbreak. And eight-in-10 IFAs (82 per cent) said that the current crisis and its impacts will result in more individuals investing in pursuit of ESG goals in the future.

This sentiment is also reflected in the communication from St. James’s Place Wealth Management. Rob Gardner, Director of SJP, is currently on a mission to modernise the company and increase its focus on ESG. Underlining the new emphasis, the company has pledged to pull money from any manager that refuses to sign up to the UN’s Principles for Responsible Investment by the end of the year.

Regulators shift towards ESG focus

Regulators are now playing a significant part in integrating ESG criteria across financial markets. Since 2018, there have been over 170 ESG-related regulatory measures proposed globally – more than the previous six years combined. Notably, the AIFMD (Alternative Investment Fund Managers Directive) and UCITs (Undertakings for the Collective Investment in Transferable Securities) will see sustainability risk integrated into new rules and guidance, with added transparency requirements that aim to aid investors. This is expected to be published later this year, coming into force in 2021.

The measure that has garnered the most attention is the upcoming change to MiFID II requirements. Yet, ironically, a recent survey of advisers across the UK found that half were unaware of this. These changes will bring financial advice firms in-line with the EU’s climate action plan through the integration of sustainability and ESG considerations, stating that advisers should ‘take sustainability risks into account in the selection process of the financial product presented to investors before providing advice, regardless of the sustainability preferences of the investors.’

Clearly, advisers will have to make ESG an explicit consideration when investing. At the very least, those who have previously resisted will have to demonstrate they have a process in place should a client ever be interested in ESG investments. And, if they fail to comply when regulations pass next year, they could find themselves under FCA scrutiny.

Clear opportunity for advisers

For those advisers who integrate new guidance and approaches to responsible investment there are a wide variety of benefits and opportunities.

Rather than being simply a matter of compliance, embedding ESG processes can elevate the role of advisers and strengthen client relationships. Assisting clients in shaping their portfolios to deliver robust market returns alongside positive environmental and social impact can help build longer and lasting relationships and involve a co-operation on a much deeper, personal level.

For advisers, there has never been a better time to embrace an ESG-led future. ESG will become an invaluable tool and will empower advisers in areas like tax planning strategies including business relief, where building a sustainable and diversified portfolio for clients is increasingly important.