Rebecca Kowalski explains how you can show your clients the way on ESG
From 2018 to 2021, my work involved developing a sustainable investment proposition for my IFA employer, communicating the benefits to staff, clients and the Central Scotland Net Zero and Sustainable Practitioners community. In 2020, the pandemic hit, oil prices dropped, tech and healthcare companies had a field day, and sustainable investment portfolios were top of the charts.
It’s a little trickier now. Performance has not been so good, clients have a lot of personal worries, greenwashing is a challenge and sustainable investing is sailing through choppy waters. While regulation is coming in to help simplify and set a course, the regulation is facing headwinds too.
Nevertheless, there are many reasons and a real business advantage for advisers to deliver sustainable finance advice well. Sustainable fund managers often refer to “leaders, improvers and laggards” to describe the companies they invest in. Despite the push and pull in the sustainability space, it is possible for advisers to move away from the crowd and become sustainable finance advice leaders.
Focusing on a couple of key areas will help you prepare for this aspirational role. The subject is covered in more breadth in the new CII Spotlight Course: ESG and Sustainable Investment, due to be released later this year.
Find your sustainable investment sweetspot
A favourite quote of mine came from Nigel Topping, UK high-level climate action champion for COP 26 Glasgow. He said the race to net zero “is one that we all lose, or that we all win together”.
It is, however, a race to which we all bring different skills and tactics. Step one is deciding how you make sustainable finance fit with your own beliefs, clients and business. While some sustainable investment choices are greener or have greater positive impact than others, you have to move at a pace that you can sustain. It’s better to start with a 10km run and work up to the Ironman. Some firms may offer only the most impactful portfolios possible in the retail space. Others prefer to offer something more closely aligned with their existing proposition. Some may opt to refer away those clients with more specific values and sustainability requirements.
If you are an ardent believer in passive investment, then figure out the best way for your trackers to steer better outcomes for people and planet. If you’ve hung your hat on outsourcing, then make sure you properly interrogate the DFM or MPS provider to test their sustainable investment credentials. If you can’t part with your long-established asset allocation framework, task your investment committee with building sustainable investment options within it.
We know that investments aren’t perfect – they go down as well as up. They surprise and disappoint, as well as delight us, and there’s sometimes devil in the detail. It’s no different with sustainable investments. You won’t find perfection but you need to find, understand and communicate the best fit for you and your clients.
Sustainability is about people not product
A sustainable finance leader does more than recommend investment products. They find their own place of comfort and confidence on the spectrum of sustainability and share that comfort with clients. Sustainability encompasses all walks of human life and perhaps you are:
- A skier, aware that snowy slopes of the past are no guarantee of the white stuff in the future.
- A lover of sunny beach destinations, where rising seas and fresh water scarcity are significant risks.
- A parent of a university student, studying with a view to working in renewable energy, environmental consultancy or law.
- A technology enthusiast with a penchant for innovation, inspired by the latest AI and greentech.
We can all find a person, place or pursuit that is our sustainability link to click on – a fast track to motivation.
The value of client education
There are relatively few retail investors who have sustainable investment preferences that are defined, non-negotiable and achievable. There are even less that understand how sustainable finance works and what options they have within it. There are, however, many who want to learn more.
According to a 2021 consumer survey about finance carried out by PA Consulting , 58% of those surveyed stated that financial businesses don’t do enough to educate customers on sustainable finance products. Some 54% were open to new sustainable ways of funding their goals but needed more education.
Both the Consumer Duty (the ‘consumer understanding’ outcome) and consumer research indicate that a key client service is delivering education – honest, accessible, accurate information about how retail sustainable finance works. This should include what it can achieve, how it can protect and what its limitations are – both on a micro and a macro level.
Consumer understanding requires that a client understands the investment product they are buying. A client holding an ESG integration fund may believe the E and S signify investment in companies that are net positive for environment and society, when they may just mean a bit of recycling of all the trees chopped down or some sophisticated reporting on staff diversity. This lack of understanding can create failure in the Consumer Duty’s ‘products and services’ outcome too.
With education comes engagement and empowerment. Some advisers have told me that their clients are not interested in sustainable investment. To that, I would respond: “Oops, you missed out a word. Your clients are not interested in sustainable investment A.”
Without appropriate information about sustainable finance, clients are unable to make informed choices about their interest in it. Communicating with clients about the type of today and tomorrow they can opt to align their money with is far more likely to spark their interest than an explanation of the mechanics of bond prices.
So, choose your mode of communication and a time and a place that works for you and your clients. Stick a guide on your website or in your newsletter, record a podcast or vlog. Throw a sustainable soiree and invite a speaker or two along. There is no shortage of people both within and outside the finance industry who can speak eloquently about sustainability. Thus, you will offer your clients the benefit of a fair chance to participate in sustainable finance, whether their chief motivation is financial and/or a desire to preserve the other things they value in life.
For life on planet earth to stay the same, many things must change. Finance is one of the most powerful mechanisms we can use to create that change. It is also one of the routes to change that creates the smallest personal disruption – unless you prefer Bournemouth to Barbados and beans over beef. Everybody has a different readiness or attitude to change and new ventures. Can you be your clients’ sustainable finance leader?
Rebecca Kowalski is the founder of Overstory Finance and a Fellow of the PFS
