The huge rise in sustainable investing is putting more pressure on financial advisers to ensure clients’ investments match their preferences and beliefs. Yet with hundreds of new funds being launched in this space and the lack of an industry-wide definition, this is no easy task.
Environmental, social and governance (ESG) issues are moving up the agenda of investors and regulators alike, making it crucial for firms to be able to incorporate non-traditional factors into theiradvice process. Working with a discretionary fund manager who specialises in this field is one way of fulfilling the needs of ethically minded clients.
Rise of sustainable investing
From environmental pollution and animal welfare to gender equality and human rights, investors are increasingly looking for ways to use their money as a force for good. Covid-19 is thought to have accelerated demand for sustainable investing because of the parallels being drawn between the unforeseen risks of the pandemic and climate change.
According to figures from the Investment Association1, UK savers put almost £1bn a month into responsible investment funds in 2020, with net retail sales reaching £1.2bn in January 2021. Funds under management grew by 66% over the preceding 12 months, in comparison to 7% growth across funds overall.
Although millennials have driven the trend of ‘investing for good’, studies suggest people across the generations are taking an interest. It helps that numerous pieces of research have shown that investing sustainably doesn’t have to mean a trade-off in performance.
The MSCI World SRI Index, which tracks companies with outstanding ESG ratings and excludes those whose products have negative social or environmental impacts, produced a total return of 163.1% over the eight years to 31 December 2020. The broader MSCI World Index returned 144.8% over the same period2.
The increasing popularity of sustainable investing is driving regulatory and policy change. In 2020, the European Securities and Markets Authority (ESMA) proposed changes to MiFID II that would require financial advisers to incorporate clients’ ethical and environmental preferences into their suitability assessments.
This builds on existing ESMA guidelines which state that it is ‘good practice’ for firms to collect information about their client’s preferences for ESG factors.
It is expected that the Financial Conduct Authority will seek to mirror European initiatives in this area. In the not-too-distant future, advisers may be expected to demonstrate that they have processes in place to accommodate clients’ sustainable investing criteria.
Identifying sustainable funds
Identifying investments that match clients’ beliefs isn’t always straightforward. There is still a lack of consistency in the terminology associated with sustainable investing. Ethical, responsible, green, conscious, sustainable, ESG and impact are just some of the badges given to funds in this space. And these terms aren’t used in a uniform manner.
Concerns have also been raised about so-called ‘greenwashing’, where organisations market their funds as green, sustainable or ethical when this is not the case.
For advisers who are responsible for building client portfolios, it is up to them to uncover what each fund manager is doing to incorporate ESG factors into their decision-making process. Yet with the number of European sustainable funds reaching 3,196 in 20203, this task has become even more difficult.
How we can help
Partnering with a discretionary fund manager such as Brewin Dolphin takes away the complexity of identifying and comparing sustainable funds yourself.
Our in-house fund research team includes ESG in the due diligence questionnaires we give to all the funds considered for our buy list. The underlying fund managers selected for our Voyager fund range and Managed Portfolio Service are signatories of the UN Principles for Responsible Investment. We use Sustainalytics, a leading third-party provider of ESG data, when constructing portfolios through our bespoke discretionary service.
We have a separate socially responsible investing (SRI) list comprised of funds that exclude harmful sectors, integrate ESG into their investment decisions, and invest in companies which contribute positively to environmental and/or social challenges. We actively engage with funds so that we can dig deep into how they consider non-traditional factors for specific companies and sectors. Our process involves quant and performance analysis, holdings analysis, and qualitative analysis, whereby we meet with fund managers twice a year and, if necessary, challenge them on controversial holdings.
At a time when interest in sustainable investing shows no signs of abating, we can help you stay one step ahead.
To find out more about how we can invest sustainably on behalf of your clients, please contact your local Business Development Manager
2 Thomson Reuters Eikon (Refinitiv)
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