'The guidelines are a tad flexible': nine IFAs on ESG challenges

In a recent set of conversations about ESG investing, IFAs opened up to us about the challenges they face concerning ethical funds

You would have to have been living in the wilderness to fail to notice the surge in popularity surrounding environmental, social and governance funds (ESG) in recent months. 

Everyone is talking about them, but that does not mean implementing ESG strategies is easy. On the contrary, financial planners are grappling with ESG solutions just as unique as their own clients' wants and needs. 

In a recent conversation with our readers, we heard about some of the problems they face when making sure clients' money is invested sustainably.

Click on to read more. 

You would have to have been living in the wilderness to fail to notice the surge in popularity surrounding environmental, social and governance funds (ESG) in recent months. 

Everyone is talking about them, but that does not mean implementing ESG strategies is easy. On the contrary, financial planners are grappling with ESG solutions just as unique as their own clients' wants and needs. 

In a recent conversation with our readers, we heard about some of the problems they face when making sure clients' money is invested sustainably.

Click on to read more. 

Name: Flora Maudsley-Barton

Firm: Parsonage Financial Planning

Title: Managing director

Location: Altrincham

Are you seeing increased demand from clients for ESG?

Definitely the trend has been up, and increasingly so in the past five years or so. I haven’t paid too much attention to who has asked for ESG and we are a small practice so we don’t take on many new clients. My perception is younger investors are more likely to say 'yes' when we mention the topic, but we do have customers of all ages invested in our ethically filtered versions of our core portfolios.

Do you find it easy to implement ESG in your portfolios?

Yes, but it is only easy because we have simple parameters we consider. As we tell our customers – we aren’t a specialist ESG house but we are happy to filter our fund selection process to favour a sustainable, responsible and impact (SRI) investing fund in any sector where there is one available. So far, in the past decade I can only recall one customer who wanted more than that.

Is there anything about ESG investing you find challenging?

It can be difficult to explain the different risks for some ethical funds, while keeping those risks in context. For example, the fund manager filters the available companies to invest in; it is only logical to conclude that doing so can result in a more concentrated portfolio.

It is my job to explain that to my client, while keeping sight of the financial planning goals they started with.

Name: Tom Morris

Firm: Ovation Finance

Title: Chartered financial planner

Location: Bristol

Are you seeing increased demand from clients for ESG?

There definitely seems to be an increase in people who are keen to explore this route. There is no particular trend on demographic; it has been quite broad.

Do you find it easy to implement ESG in your portfolios?

The availability and universe of good ESG funds is growing all the time. Therefore it is becoming 'easier' to build a suitable portfolio. That being said, the extra layer of screening and research required to make sure it meets a client’s needs or values adds time.

Is there anything about ESG investing you find challenging?

Making sure you understand the client's needs. One person’s ESG is very different to another’s.

Certain areas in the world are still limited in this space, emerging markets and Asia being an example.

ESG is active by nature so the portfolio fund costs tend to be higher than our non-ESG portfolios. Explaining this to clients is important.

Name: Matthew Parden

Firm: Aspinalls Group

Title: Chief executive 

Location: London

Are you seeing increased demand from clients for ESG?

An increasing interest, but not a flood – and the demographic is no different to our typical client demographic, which is individuals over the age of 55. Generally, the interest is because of an inherent ethical conviction.

Do you find it easy to implement ESG in your portfolios?

The supply of ethical funds is increasing and this goes hand in hand with, and to an extent is driven by, increasing public awareness and increasing demand from clients and advisers.

We run the same asset allocation as our 'non-ethical' portfolios, which means the same research process determines how an ethical portfolio looks at an asset allocation level.

Is there anything about ESG investing you find challenging?

The increase in the number of ethical funds means there is more choice and more competition, which puts downward pressure on funds' fees.

We prefer passive investments so the challenge is finding passive ethical funds in certain sectors, such as fixed interest.

Name: Dhawal Chandan 

Firm: Just Financial Group

Title: Director and chartered financial planner

Location: Glasgow 

Are you seeing increased demand from clients for ESG?

The recent media coverage (especially thanks to David Attenborough and the BBC documentaries team) has led to wider knowledge, understanding and overall consciousness towards ESG and responsible investing. We are therefore seeing more and more clients interested in knowing more about this style of investing.

The main reason for clients inclined towards ESG investing tends to be where they really want to 'make a difference' and feel they are contributing personally towards a better tomorrow for future generations. A lot of clients also like to use this as a diversification strategy within their overall portfolios.

Do you find it easy to implement ESG in your portfolios?

Over the years we have seen this sector evolve continually. Initially the available funds/portfolios mainly focused on 'avoidance of specific industries' (negative screening) and now we have a wide range of funds that adopt a 'positive selection criteria' (positive screening) where the focus is on a particular cause, whether that be climate change or sustainability for example.

Asset managers/discretionary fund managers are continually coming up with a wider choice and variety of ESG funds, which has made the implementation of such portfolios much easier than five or six years ago.

Is there anything about ESG investing you find challenging?

Although the choice of funds now available is much bigger than before, it may still be difficult to get a well-diversified fund/portfolio for a client who may have a very strict and specific mandate. Unless, of course, you build a portfolio yourself by selecting the individual stocks/bonds within it.

Name: Lee Millard

Firm: Wealth Solutions

Title: Director

Location: Birmingham

Are you seeing increased demand from clients for ESG?

I believe there is a slow shift towards ESG, primarily sparked by a generational swing towards investing. Typically clients are being exposed to more information on social media platforms and through the media of the wider impacts of businesses on environmental issues.

Do you find it easy to implement ESG in your portfolios?

We have not had a lot of clients particularly stipulating the need for ESG funds. Our centralised investment proposition is largely outsourced and, as such, these are generally created as part of the wider-ranging investments.

Is there anything about ESG investing you find challenging?

Everyone has their own views on ESG, and what may be suitable parameters for one client may not be so for another.

Name: Gary Jefferies 

Firm: Panoramic Wealth

Title: Managing director

Location: Tunbridge Wells

Are you seeing increased demand from clients for ESG?

Some increased interest among older, existing clients but mainly those who were already ethically orientated. Younger groups especially millennials are more responsive and, although more companies are adopting ESG considerations, this can mean the portfolio/funds are tilted towards smaller companies.

Do you find it easy to implement ESG in your portfolios?

It is not straightforward as the basis is on a scale rating for ESG, which goes from 0%-100%. So, in turn, does the question of how green clients wish to be.

Is there anything about ESG investing you find challenging?

That younger investors are more cautious generally. It requires a long discussion with them to explain why investing with high requirements of ESG can push them along the risk scale more and, in turn, be more be more volatile.

Name: Russell Brett 

Firm: Matthew Douglas

Title: Director

Location: Ipswich

Are you seeing increased demand from clients for ESG?

There was no particular uptake in ESG investing during 2018. We have had more discussions around it, but no firm commitments to this approach.

Do you find it easy to implement ESG in your portfolios?

Yes, we have separate model portfolios for three key risk-ratings: cautious, realistic and aggressive.

Is there anything about ESG investing you find challenging?

ESG is an umbrella term for various 'sustainable' investments. It is not instantly easy to filter out what particular ESG factors are being respected in each fund and how to communicate to clients.

Name: Alex Shaw

Firm: Progeny Wealth

Title: Director

Location: London

Are you seeing increased demand from clients for ESG?

Yes, we are. In addition to the more traditional faith or belief-based reasons for ESG investing (i.e. no tobacco, armaments or oppressive regimes), there is an increase in the desire for younger investors to feel like they are ‘doing their bit’ for the world they live in.

Just as someone would now rather buy a bunch of fairtrade bananas, some clients now want to have more of a ‘feel-good factor’ regarding their portfolio and its exposure.

Do you find it easy to implement ESG in your portfolios?

Yes, our process for picking funds is initially quant driven. We look for consistency in manager performance and it is restricted to first and second quartile over varying time periods.

Alongside this, we do a large part of ratio analysis and within that we feature a number of ESG funds. They are there on their own merit and the ESG overlay can almost be seen as a bonus.

There is no longer a perception that you’d need to compromise performance in favour of the ESG stance. We use a number of ESG funds in non-ESG focused portfolios.

Is there anything about ESG investing you find challenging?

The one criticism for me right now is the number of new/rebranded funds that now claim to be ESG. It feels like the guidelines are a tad flexible and this could be misleading to clients and make building portfolios that meet specific needs challenging.

 

 

Name: Graham Frost

Firm: PK Group

Title: Chief investment officer

Location: Richmond 

Are you seeing increased demand from clients for ESG?

There are over 2,000 papers on the correlation between ESG stocks and performance. Recent studies by MSCI show ESG companies are more profitable, have a lower stock-specific risk and less market risk. ESG investing is now mainstream.

Do you find it easy to implement ESG in your portfolios?

Our approach is to build in ESG as part of the due diligence when selecting active managers. If we need to increase that, we can adjust it with exchange-traded funds (ETFs). Most of our active managers will score above average or high on ESG characteristics.

Why? Because it makes commercial sense. Active managers get paid to outperform. If ESG stocks fit that profile, they should be selected.

Asset managers may be in the early days of full ESG integration into their business philosophy. But they have the tools to integrate ESG into their portfolios, such as screening, and fundamental analysis. They also need to be able to communicate the effectiveness of ESG integration.

Fund selectors can ask questions about the manager’s use of internal versus external ESG research, team knowledge, and how ESG factors affect portfolio construction. Of course, this can result in incomplete ESG integration. But you may not want to go the whole hog because allowing discretion allows selection of up-and-coming businesses that haven’t yet integrated ESG but are on the way.

It also avoids a bias to technology and communication firms and the like that always score highly on ESG.

It is also pretty hard to get consistent data globally and even the rating agencies differ a lot on their ESG scores. There are no widely accepted global reporting standards for ESG.

Is there anything about ESG investing you find challenging?

Using active managers helps avoid the overlap you can pick up when investing in factor-based ETFs like quality and low volatility. Given the above, it should be no surprise we would not feel the need to build client portfolios on an ESG-only basis.

That said, we offer a bespoke service to do what the client wants. We have clients across age brackets and very few have specifically asked for ESG-only portfolios. We would anticipate that due to rising media coverage.

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