As clients became increasingly aware of and concerned about ethical issues, advisers are observing a significant rise in demand for sustainable and environmental, social and governance investment solutions.
According to Scott Gallacher, director at Rowley Turton, this trend was initially supported by the apparent outperformance of these types of funds.
“Unfortunately, more recently, some of these funds have underperformed,” he adds. “Consequently, we are finding that clients are now less inclined to take a proactive stance on such investments if they may hamper their returns.”
“As a result, many are adopting a less stringent approach to their investment strategies.”
Samuel Mather-Holgate, independent financial adviser at Mather and Murray Financial, says more clients are showing a preference for ESG investing.
Most commonly, climate change is the top driver for ethical investing, although clients do sometimes show a preference for no animal testing or controversial weapons and arms sales.
Conversations are key
Additionally, fund managers are getting savvy to these trends and most offer a prospectus on their ESG credentials.
“However, for those who have zero tolerance for a specific sector, outsourcing to a specialist manager can be a great solution,” Mather-Holgate adds.
Paris Jordan, head of responsible investing at Charles Stanley, says conversations with clients are key to ensuring they understand the approaches and the implications of such approaches – risk, return, exposures etc.
Each client is different and so should the discussion around sustainable approaches be.
Jordan adds: “Clients have tended to have varying interest in the detail of the sustainable approaches undertaken; much the same as those who demonstrate a keen interest in companies held within their portfolios versus those who are more interested in their portfolio outcomes more broadly.
“We have witnessed those with strong ethical values be very clear on what they do not wish to invest in, and we work heavily with them on setting their preferences. Others present themes they wish to invest alongside, such as climate change, nature, and renewables.
“On the other end of the spectrum, we have seen that many clients are comfortable with highly diversified sustainable model portfolios, which have broader objectives.”
With the Financial Conduct Authority extending its sustainability disclosure requirements to portfolio management and the continued efforts to tackle greenwashing and greenhushing, the world of ESG and sustainable funds is predicted to expand further.
Gemma Woodward, head of responsible investment at Quilter Cheviot, stresses that this underscores the importance of being up to speed and trained in this area of investments.
This is because clients will increasingly be asking about or for sustainable-related investments, so the advice industry needs to have the confidence and skills to have those conversations.
She says: “The FCA is working with advisers to help open these communication channels, but more needs to be done by everyone, given the rules will come into force imminently.
