This article first appeared in Professional Adviser.
While ethical investing – or ESG – might have shifted from a fringe notion to the financial mainstream in recent years, it remains a complex and continually shifting phenomenon…
Not only does ethical investing mean different things to different people, it also relies upon an intricate mesh of underlying factors and external circumstances which can change overnight.
The war in Ukraine, for instance, has made that fluidity abundantly – perhaps uncomfortably – clear over the past few weeks, leading many clients to re-evaluate the ethical merits of their own portfolios.
With advisers now having a crucial role to play in that evaluation process, it has arguably never been more pertinent for firms to be reviewing their approach to ESG engagement and considering where processes might benefit from a refresh.
In an ever-changing landscape, flexibility is key. With this in mind, there are three core areas which can help advisers facilitate more fruitful conversations and strengthen their ability to support clients’ combined ethical and financial objectives.
- Revisit your ethical investing questionnaire
Pretty much every financial adviser will have had their clients fill out a questionnaire based on their ethical principles and preferences at the start of the relationship, but the chances are the world will have changed since these were completed.
With recent events leading many people to question how far their ethics extend, it’s worth revisiting this exercise and taking the opportunity to ‘stress test’ the principles laid out in the initial questionnaire. Before doing so, however, consider any additional questions you could be asking to account for current events – how do clients feel about defence stocks, for example?
Longer term, advisers should also consider adding a point on ESG to the agenda for at least one client meeting per year. This is key to continually keeping abreast of how clients’ values might have evolved – and importantly enabling the adviser to assess where strategy adjustments might be needed.
- Ask your DFM about its ESG portfolio make-up
In order to have truly stringent conversations with clients, you need to have a granular understanding of their investment portfolio – right down to the ethics of individual holdings within funds.
Apple, for example, is generally considered a pretty solid investment, but there’s always been room to question its ethics owing to some of its manufacturing processes. More recently though, the firm has taken a stand against Russia by closing its on-the-ground stores and withdrawing support from Russian apps, meaning it could potentially be more appealing to an ethical investor.
Elsewhere, there’s been much discussion around arms manufacturers and whether we should be altering our assessment of such stocks given they are helping to defend the fabric of society. This debate calls for a whole other article in itself, but is a topical example of an issue advisers should seek to understand from their client’s standpoint.
All of this goes to show why it’s important to ask your DFM (if you use one) to fill you in on their current criteria for selecting ethical funds and ensure they are delivering regular updates and reasoning relating to any changes being made within portfolios. Having this context is key to having informed discussions with clients and helping them come to a reasoned conclusion as to where their money should be invested.
- Have an open conversation with clients
Most clients want to invest ethically, but why should they? And on what terms? Once you’ve obtained an initial sense of clients’ values from the questionnaire and gleaned the necessary insights from your DFM, you’ll be in a good position to probe clients’ principles and allay any concerns. Only then can you help them define what ethical investing really means to them.
As part of this process, be brutally honest about the potential for ethical investing to reduce returns. The aim here isn’t to convince people to change or water down their ESG principles, but rather establish an honest and open dialogue which will be essential to ensuring you can help them maximise potential opportunities on a long-term basis.
Reassure clients that ESG is never black and white and so it’s okay to be torn on an issue, feel conflicted at times, and to need to make continual adjustments to their ethical tack as the social and political waters shift beneath them.
Now, more than ever, there is no one-size-fits-all solution to the ethical investing conundrum. Having the processes in place to facilitate a flexible and personalised approach is the most important step when it comes to devising an ethical investing strategy that truly supports a client’s values and objectives.