Much has been written about sustainability and environmental, social and governance (ESG) issues in recent months. The industry is moving increasingly quickly now and the topic of sustainability is front-and-centre in the news and media. In the last few weeks alone, we had the landmark ruling in the Hague requiring Royal Dutch Shell to cut their emissions faster, while at Exxon Mobil, activist shareholders voted new directors onto the board.
Less, however, has been written about advisers and their practical experiences ‘on the ground’ when it comes to discussing sustainability with the people who really matter – our clients. As such, I thought it would be helpful to share some of our early research findings in this area, talking to advisers and examining how they are using various tools and approaches.
When it comes to overall approach, it appears advisers typically fall into one of three camps. The first camp are those who are very educated about the topic and have developed quite detailed question sets to engage with their clients around their preferences – what type of investments they want to avoid or those they wish to adopt in order to make a positive impact. This group is very definitely in the minority – our early research showed only about 2% of advisers wanted to go into a detailed ethical screening process along these lines.
The second group are not particularly engaged with the topic and generally do not raise it – indeed, even actively avoid it – with clients, mostly because it is relatively new and seemingly complex to view investing through the lens of sustainability. In other words, it is put in the ‘too difficult’ box. Again, this group of dis-engaged advisers is very definitely in the minority.
Finally, the third group are looking to incorporate sustainability into their advice and reviews, but the topic is relatively new and it is multi-faceted, so they are looking for more help and ways to engage with it. In our survey of Dynamic Planner users, we found some 85% of respondents wanted more information on the sustainability of investments, and the tools that would help them to engage and have good conversations with clients.
On that final point, it is clear that advisers wanting to integrate ESG considerations into their factfind process are looking for increased support, and this really comprises two aspects – developing an understanding of both the client’s situation and preferences; and then matching that with the make-up of the investment solution itself.
Psychometric questionnaire
To briefly provide some background on how we have tackled this issue at Dynamic Planner, we have built the UK’s first psychometric sustainability questionnaire to help firms understand how important sustainability really is to a client versus other drivers – in particular financial considerations. With this in mind, we built it using the same framework as our psychometric risk questionnaire, which has been completed over 1 million times, and we host it in a single client-profiling area to ensure sustainability is seen – and presented as – one component part of assessing a client’s overall investment approach.
Psychometric questionnaires are designed to cut through the noise and isolate the individual from external circumstantial distortions due to the constant supply of information, particularly through the media. It is important clients do not invest in ESG investments merely because it feels ‘fashionable’ or because they expect them to consistently outperform, as some commentators have suggested.
Instead, the aim of the questionnaire is to pull out the key aspects of investor behaviour when it comes to sustainability:
* Psychological distance: How important it is that companies you invest in manage their risks for your benefit as well as others even though the rewards might be some way off in the future in terms of avoiding climate change?
* Personal values: How important it is that your values and beliefs are taken into consideration when making recommendations?
* Emotional benefit: How would you feel knowing that companies you invest in have a negative or positive impact on the environment and society?
* Positive impact: To what extent would you like to actively engage with companies to ensure your investments have a positive impact on the environment and society at large?
* Financial considerations: How willing are you to reduce your investment opportunities for the benefit of the environment and society, and to accommodate your personal values?
As a result, the questionnaire provides a robust, repeatable process for advisers to truly ascertain the importance of sustainability as part of each client’s overall investment approach.
On the investment solution side of the matching, meanwhile, we shy away from manager questionnaires and instead look for the data. We have partnered with MSCI to use their ESG ratings, which are based on publicly disclosed data. Advisers can therefore be confident they have a consistent, objective methodology on which to base their recommendations.
The combination of the questionnaire and the MSCI ratings has now been in operation for several weeks so, through our interactions with advice businesses, we are able to see how firms are tackling sustainability in practice. Already some trends are emerging.
Emerging trends
First, many firms are reporting that sustainability is being mentioned unprompted by clients, so it is increasingly clear advisers need to be prepared to hold discussions around this topic. General conversations are always useful but firms will require these to be held and documented in a consistent way. Using a psychometric questionnaire to open the conversation should be engaging for clients, as well as helping advisers build deeper insight into what drives them. Ultimately, it should mean any recommendations stand the test of time, and that advisers are fully prepared for the regulations we expect to come.
Our research and the early adoption of the new questionnaire shows around two-thirds of clients see sustainability as being of ‘somewhat’ to ‘high’ importance. At the same time, fewer than 5% see it as ‘very high’ importance. This a topic that will be engaging for the great majority of clients who are looking for some guidance, but only occasionally will it be the single defining factor behind a client’s investment approach.
Our early data is also telling us some 80% of respondents who say sustainability is important are in their 50s or older. In other words, sustainability is not just a millennial thing – your middle-aged and older clients are highly likely to be thinking about it and looking to you to help them ensure their portfolio is a suitable match.
This presents a significant and rapidly growing opportunity for advisers who embrace this topic – and knowing which funds have stronger sustainability credentials is of course key here, particularly for those firms who build a centralised investment or retirement proposition.
Risk-based financial planning is a game changer for sustainability because it gives clients and their advisers much more flexibility when it comes to investment selection. When you are not benchmarking portfolio performance solely against a high-profile index and, instead, are anchoring to the risk benchmark, you have greater choice over which investments can be included or excluded. Getting the risk right first is the crucial foundation to that approach.
Despite the extensive coverage of sustainability over the last 12 months, we are clearly in the early stages of advice firms translating this into practice with clients. Nevertheless, the indications are encouraging. The tools and support structures are now in place to enable advisers to engage with clients at a deeper level, which in turn should lead to greater engagement with the overall financial plan – and ultimately a greater appreciation of the value of professional advice.
Ben Goss is CEO of Dynamic Planner
