ESG investing is fast becoming an important part of the financial landscape. And with financial regulators paying close attention to the ESG small print, advisers need to be staying on top of the fast-changing environment.
So what should advisers know about the future of ESG, and how can they help clients invest sustainably?
Environmental, social and governance (ESG) investing, also known as socially responsible investing, is booming.
In 2020 investments into ESG products increased by 140%, making them the most attractive options around. The same survey found that nearly 60% of investors are using ESG principles to better guide their investment decisions.
Advisers themselves have reported a 41% increase in ESG enquiries. Whether it’s the socially responsible and sustainable investing that these products promise, or for the improved performance many ESG funds appear to offer to investors, financial advisers are increasingly being asked to take a view, or give advice, on the current state of affairs when it comes to ESG investing.
And it’s not just advisers who are paying closer attention. Financial regulators around the world are moving to shore up the criteria of what really constitutes an ESG-friendly investment, and to crack down on ‘green washing’.
Financial regulators in the UK and EU, for example, have both unveiled new regulations to encourage more accurate ESG reporting among companies.
But for all the growing interest and demand for ESG products, the current landscape is inconsistent between countries and steeped in uncertainty. As a result, clients are turning to their advisers for the right advice. So if your clients are asking for guidance, here’s what you need to know.
As with any other investment, it’s important to understand exactly what your clients are looking for.
While ESG investments ensure that investor’s money goes into sustainable, socially committed and well-governed causes and businesses, they are ultimately still investments, thereby needing some promise of a decent return further down the line.
Ask your clients the usual queries about risk appetite, what kinds of returns they are expecting and which asset classes they may be looking to put their money into.
You should also consider what specific sectors your clients may want to invest in.
Not every investment labelled an ‘ESG investment’ will pay out the same returns, so while your clients may want to invest into a number of socially responsible companies, it’s important that a comprehensive analysis is done to make sure these investments are right for your client.
There are some common questions that clients are asking their advisers, so be ready to answer the following queries.
What’s behind the growth in ESG funds? While there’s no single answer, growing awareness of the need for sustainable and moral business and investment practices is one of the biggest factors. Companies are having to become increasingly transparent in the way they operate and to make commitments to help protect the environment. This is something customers and clients are coming to expect, and so it’s important that businesses are choosing investments that align with these priorities and don’t directly or indirectly support businesses that are negatively impacting the environment or social justice.
Can ESG funds help me achieve my financial goals? There is a diverse range of ESG products to cater to each person’s needs. Whether your client is after a high- or low-risk investment, is looking to make a short-term profit or save for the future, ESG funds can certainly help your clients achieve their goals.
What kinds of ESG investments are there? Each ESG-friendly option will have its own specific criteria, but depending on what your client is looking for, they could choose to invest in funds that screen out certain non-ESG stocks, into renewable energy companies or into businesses that are driving social impact.
It’s also important for you to understand exactly what your clients’ priorities are in order to provide effective advice on whether ESG investing is for them. Here are some questions you could ask:
How strongly do you feel about a company’s climate footprint? Depending on the extent to which your clients care about a company’s climate credentials, they may be more or less amenable to an ESG investment.
When would you like your investments to start repaying? Many ESG investments operate on longer-term timelines than other investments. If your client is looking for a quicker return, ESG investing may not be the best option.
Are there any sectors your clients want to actively avoid investing in? While your clients may not be interested in or au fait with the entire scope of ESG investing, even narrowing down which causes your clients don’t want to invest in can open up a range of socially responsible options.
Some of your clients may be reluctant to invest into ESG funds due to the slower returns that such investments can have. Nonetheless, it’s undeniable that socially responsible and sustainable investing is quickly growing in popularity.
This increase in investor appetite for ESG funds is building plenty of extra demand for a wide range of ESG products.
It should also be noted that governments around the world are investing billions – sometimes even trillions – into fuelling a sustainable post-Covid recovery.
The US has recently passed legislation that will invest over $1 trillion into the American post-Covid recovery, and a significant proportion of the funds will go towards sustainable industries. The renewables sector is set to continue its significant growth trajectory, making it an attractive investment option.
In line with the growing popularity of ESG investing, global financial regulators are increasingly looking for ways to make sure that some companies are not able to falsely offer ESG investments for financial profit.
Green washing has become an area of concern for regulators, so 2022 may see some increased regulation that tightens the definition and reporting of ESG funds.
Demand for ESG investing is skyrocketing, but in this fast-changing landscape, potential clients are looking for trusted advisers to help them find the right investments for their needs. Find your next clients on Unbiased.